The transformation of the German Democratic Republic (GDR or East Germany) has important lessons for Cuba as the island opens up to increased banking, agriculture and telecommunications exchange with the U.S. But there is a major difference: the GDR liberalized its political system first, removing the fear that Soviet troops might intervene and the secret police, the Stasi, might round up dissidents. Mikhail Gorbachev’s contempt for GDR leader, Erich Honecker, and his policy of self-determination resulted in Soviet restraint towards political liberalization in the GDR, as well as Poland and Hungary.

Twenty five years later, Cuba faces an opportunity to liberalize its economy and maybe its politics. President Obama’s decision to restore full diplomatic relations with the island nation enables U.S. institutions to open accounts at Cuban financial institutions, offers U.S. entities in third countries—such as in the European Union and Canada—to transact business with Cubans in third countries, provides access in Cuba to U.S. banks through the use of credit cards and permits the export of telecommunications infrastructure as well as building materials and agricultural equipment to private citizens and small farmers. In short, Cubans will be allowed to access U.S. banking, telecommunications and agricultural sectors. This is the limit of what Obama can undertake through executive action in these areas. To lift sanctions, he must seek legislative changes.

With access to U.S. credit, Cubans will be able to take advantage of President Raúl Castro’s offer to privatize government owned stores and restaurants. However, privatization and access to credit do not alone restructure a centrally controlled economy. A market-based pricing and monetary system, together with a regulatory framework, have to be created. There is no shortage of potential advisors from the former GDR, Poland and Hungary who can advise Havana on the preferred transformation models. The process can be painful with the ending of subsidies, but the prospect of a market economy with opportunities to create wealth lured many in Eastern Europe and may draw many more in Cuba to become entrepreneurs.

The economic transformation in the GDR was accompanied by loosening of the political system and the holding of free elections. The archives of the infamous Stasi were opened, enabling citizens to examine their own files and discover who had spied upon them. This opening, known by the Russian word glasnost, changed the culture of East Germans. It enabled citizens to criticize their government, complain of shortages and mock political leaders. Are the Castro brothers willing to do the same?

Fidel Castro objected fiercely to glasnost when Mikhail Gorbachev visited Cuba in April 1988. He claimed that glasnost would undermine the communist system and he was right. To what extent will his brother Raúl seek to still control independent voices on the island? With increasing access to Internet and social media, will he continue the overt repression of dissidents? Cuban dissident, Yoani Sánchez, has a considerable following on her blog but mostly off-island. Two years ago she was permitted to visit Europe and the United States to deliver her candid assessment of life on the island. Upon return, she has continued to call for political openings and started a digital magazine. Others have followed her, although artists have still been called into the police precinct for questioning. Today, we cannot write that glasnost has reached Cuba.

The removal of fear among citizens to express themselves is the single most important factor that ended Soviet regimes in the GDR and elsewhere. With the knowledge that a jail sentence no longer followed criticism and street protests, citizens in the GDR came out in their thousands in October 1989 to protest the regime. When the GDR’s spokesman inadvertently blurted over the radio that travel to the West could occur “now,” thousands of Berliners heard him and rushed toward the Berlin Wall. The guards had no instructions to shoot and were quickly overwhelmed by fellow East Germans tearing down the dreaded Wall.

Is there an equivalent in Cuba? Not yet. Instead, both the Cuban and U.S. governments have approached the openings cautiously, taking each measure step by step. Washington fears the rush of Cuban citizens jumping into boats to reach Florida, and Raúl Castro tests each liberalizing step in an agonizingly slow manner.

Global events are now pushing both Washington and Havana to move faster. Both of Cuba’s sponsors, Russia and Venezuela, are in serious financial straits and must deal with a 46 percent fall in the price of petroleum. For a second time in 25 years, the Castro brothers face a serious decline in energy and aid from their principal patrons. In 1991, they asked their citizens to create in Cuba renewable energy and foods. Now, they are offering a new alternative, namely access to U.S financing and the chance to expand their small enterprises.

If Raúl Castro opens up the political system step-by-step, we may see a shift to liberalism. His release of 53 political prisoners is a good start, but the test will come when he allows his critics to test the limits of Cuba’s new freedoms. We should follow Castro’s treatment of his fellow citizens closely over the next few months to evaluate the Cuban people’s response to U.S. openings.

Authors

The transformation of the German Democratic Republic (GDR or East Germany) has important lessons for Cuba as the island opens up to increased banking, agriculture and telecommunications exchange with the U.S. But there is a major difference: the GDR liberalized its political system first, removing the fear that Soviet troops might intervene and the secret police, the Stasi, might round up dissidents. Mikhail Gorbachev’s contempt for GDR leader, Erich Honecker, and his policy of self-determination resulted in Soviet restraint towards political liberalization in the GDR, as well as Poland and Hungary.

Twenty five years later, Cuba faces an opportunity to liberalize its economy and maybe its politics. President Obama’s decision to restore full diplomatic relations with the island nation enables U.S. institutions to open accounts at Cuban financial institutions, offers U.S. entities in third countries—such as in the European Union and Canada—to transact business with Cubans in third countries, provides access in Cuba to U.S. banks through the use of credit cards and permits the export of telecommunications infrastructure as well as building materials and agricultural equipment to private citizens and small farmers. In short, Cubans will be allowed to access U.S. banking, telecommunications and agricultural sectors. This is the limit of what Obama can undertake through executive action in these areas. To lift sanctions, he must seek legislative changes.

With access to U.S. credit, Cubans will be able to take advantage of President Raúl Castro’s offer to privatize government owned stores and restaurants. However, privatization and access to credit do not alone restructure a centrally controlled economy. A market-based pricing and monetary system, together with a regulatory framework, have to be created. There is no shortage of potential advisors from the former GDR, Poland and Hungary who can advise Havana on the preferred transformation models. The process can be painful with the ending of subsidies, but the prospect of a market economy with opportunities to create wealth lured many in Eastern Europe and may draw many more in Cuba to become entrepreneurs.

The economic transformation in the GDR was accompanied by loosening of the political system and the holding of free elections. The archives of the infamous Stasi were opened, enabling citizens to examine their own files and discover who had spied upon them. This opening, known by the Russian word glasnost, changed the culture of East Germans. It enabled citizens to criticize their government, complain of shortages and mock political leaders. Are the Castro brothers willing to do the same?

Fidel Castro objected fiercely to glasnost when Mikhail Gorbachev visited Cuba in April 1988. He claimed that glasnost would undermine the communist system and he was right. To what extent will his brother Raúl seek to still control independent voices on the island? With increasing access to Internet and social media, will he continue the overt repression of dissidents? Cuban dissident, Yoani Sánchez, has a considerable following on her blog but mostly off-island. Two years ago she was permitted to visit Europe and the United States to deliver her candid assessment of life on the island. Upon return, she has continued to call for political openings and started a digital magazine. Others have followed her, although artists have still been called into the police precinct for questioning. Today, we cannot write that glasnost has reached Cuba.

The removal of fear among citizens to express themselves is the single most important factor that ended Soviet regimes in the GDR and elsewhere. With the knowledge that a jail sentence no longer followed criticism and street protests, citizens in the GDR came out in their thousands in October 1989 to protest the regime. When the GDR’s spokesman inadvertently blurted over the radio that travel to the West could occur “now,” thousands of Berliners heard him and rushed toward the Berlin Wall. The guards had no instructions to shoot and were quickly overwhelmed by fellow East Germans tearing down the dreaded Wall.

Is there an equivalent in Cuba? Not yet. Instead, both the Cuban and U.S. governments have approached the openings cautiously, taking each measure step by step. Washington fears the rush of Cuban citizens jumping into boats to reach Florida, and Raúl Castro tests each liberalizing step in an agonizingly slow manner.

Global events are now pushing both Washington and Havana to move faster. Both of Cuba’s sponsors, Russia and Venezuela, are in serious financial straits and must deal with a 46 percent fall in the price of petroleum. For a second time in 25 years, the Castro brothers face a serious decline in energy and aid from their principal patrons. In 1991, they asked their citizens to create in Cuba renewable energy and foods. Now, they are offering a new alternative, namely access to U.S financing and the chance to expand their small enterprises.

If Raúl Castro opens up the political system step-by-step, we may see a shift to liberalism. His release of 53 political prisoners is a good start, but the test will come when he allows his critics to test the limits of Cuba’s new freedoms. We should follow Castro’s treatment of his fellow citizens closely over the next few months to evaluate the Cuban people’s response to U.S. openings.

Authors

]]>
http://www.brookings.edu/blogs/up-front/posts/2014/11/20-refugee-parole-central-american-minors-negroponte?rssid=negroponted{50B982BD-3B89-4B67-9FFB-95EDD6C5F751}http://webfeeds.brookings.edu/~/79155538/0/brookingsrss/experts/negroponted~A-Refugee-and-Parole-Program-for-Central-American-MinorsA Refugee and Parole Program for Central American Minors

Vice President Biden’s announcement that the State Department and the Department of Homeland Security (DHS) will establish a refugee resettlement program to enable minors to seek refugee and parole status in the United States is most welcome. The new program was announced at a summit meeting of three Central American presidents on November 14. It forms part of U.S. efforts to address the crisis of children, together with young mothers, crossing the border in the thousands at the Rio Grande valley to reunite with family members in the United States. The program begins this December.[1]

The U.S. government could have relied upon the declining number of unaccompanied minors arriving from El Salvador, Guatemala and Honduras to avoid any obligation to address the underlying problems. Instead, following Biden’s remarks, the State Department announced straightforward procedures that offer procedural and safe passage into the United States either as a refugee or with parole status. Instead of risking their lives through a treacherous journey to reach the U.S. southern border, unmarried minors under 21-years-old can now be processed in their own countries.

From its high peak of 16,404 unaccompanied minors (0-17-years-old) from El Salvador, 17,057 from Guatemala and 18,244 from Honduras in FY 2014, which ended on September 30, the number of apprehensions at the U.S. border has fallen significantly.

In October 2014, 1,551 unaccompanied minors were apprehended at the Rio Grande Sector compared to 2,652 in October 2013, a 42 percent reduction year on year. However, in the same geographic sector the number of family unit apprehensions increased by 6 percent over the same period.[2] The numbers indicate that a significantly reduced number of unaccompanied children are reaching the southwest border, but mothers and their young children continue to move northward.

Most arrive in search of a parent or close family member. According to a survey carried out by the UN High Commission for Refugees, 48 percent claim that violence in their community forces them to flee. A further 21 percent of the children surveyed claimed abuse and violence from a caretaker in their home.[3] Others seek better economic opportunities, and many claim a combination of all three factors. The State Department recognized that the violence from criminal gangs in the three sending countries, together with the presence of a parent in the United States, provided adequate basis for determining whether the minor was eligible for refugee status, and failing that parole status.

Refugee status

A parent who is legally in the United States can initiate the petition for the minor child or children as refugees with the help of a designated resettlement agency. (A broad range of these agencies are already registered with the State Department’s Bureau of Population, Refugees and Migration to help resettle refugees in the United States) A more limited number of designated agencies will be announced to work with Central American petitioners by the end of November. With the help of the agency, the parent legally in the United States will complete a State Department form DS-7699. He or she can also petition for the other parent of the child so long as they are currently married to each other. As part of the petition process, the designated agency will help the U.S. parent submit to DNA testing to confirm biological relationship with the minor child.

In the three Central American countries, the UN’s International Organization for Migration will manage the process by contacting each child and inviting them to a pre-screening interview. The published purpose is to prepare the child for a refugee interview with a DHS official, but we must assume that it is also intended to weed out minors who fail to meet the basic requirements.

With DNA establishing a parental relationship, the child proceeds to an interview with a DHS official in their home country. This is the critical test because DHS will establish whether the child has grounds for refugee status based upon “a well-founded fear of being persecuted for reasons of race, religion, nationality, membership of a particular social group or political opinion.” The most credible fear for these children is “membership of a particular social group” such that gang members seek to recruit, prostitute or harm them if they refuse to join, or align under pressure with the opposing illicit gang.

Parole status

Should the child not qualify for refugee status, he or she can apply for parole based on a DHS finding that the “individual is at risk of harm, clears all background vetting, there is no serious derogatory information and someone has committed to financially support the individual while in the United States.”[4]

These conditions are not onerous and are intended to protect children from violence, abuse and neglect. Parole does not give the child permanent immigration status or a path to the same. Nor are parolees eligible for medical and other benefits beyond schooling and the right to work. However, the parolee can remain in the United States for two years and may extend that period thereafter.

For those children with legal counsel, a legitimate fear of sexual harassment, bodily harm from gangs or intra-family feuds can often be established, but for those children without counsel and over anxious in the interview with a U.S. official, the grant of parole status is the more likely outcome. We should therefore expect more children to qualify as parolees – entering on a temporary basis rather than permanent refugees.

Ceiling to the number of refugees

Currently 4,000 refugees may enter the U.S. from Latin America and the Caribbean in the fiscal year 2014 to 2015. Given the 61,705 unaccompanied minors detained by Customs and Border Patrol in FY 2014, the current quota will not be sufficient to meet the needs of those who qualify as refugees. Therefore, we should support lifting the current ceiling to accommodate the anticipated larger number of petitioners for refugee status from three northern Central American nations. There is no limit on the number of parolees that may enter the United States in any one year.

The speed with which both State and DHS reached agreement on processing petitioners for refugee and parole status in their respective countries indicates an admirable capacity to adapt. DHS Secretary, Jeh Johnson’s seven visits to the southwest border this year and his interaction with the children have encouraged him to act judiciously and relatively fast. He reflects American compassion toward these children, and often their mothers, who risk so much to join a parent in the United States. The program recognizes that there is a war in Central America and the respective states are incapable of protecting their young citizens from gangs and organized crime. This program responds to Emma Lazarus’ poem engraved in the bronze plaque at the pedestal of the Statute of Liberty:

Authors

Vice President Biden’s announcement that the State Department and the Department of Homeland Security (DHS) will establish a refugee resettlement program to enable minors to seek refugee and parole status in the United States is most welcome. The new program was announced at a summit meeting of three Central American presidents on November 14. It forms part of U.S. efforts to address the crisis of children, together with young mothers, crossing the border in the thousands at the Rio Grande valley to reunite with family members in the United States. The program begins this December.[1]

The U.S. government could have relied upon the declining number of unaccompanied minors arriving from El Salvador, Guatemala and Honduras to avoid any obligation to address the underlying problems. Instead, following Biden’s remarks, the State Department announced straightforward procedures that offer procedural and safe passage into the United States either as a refugee or with parole status. Instead of risking their lives through a treacherous journey to reach the U.S. southern border, unmarried minors under 21-years-old can now be processed in their own countries.

From its high peak of 16,404 unaccompanied minors (0-17-years-old) from El Salvador, 17,057 from Guatemala and 18,244 from Honduras in FY 2014, which ended on September 30, the number of apprehensions at the U.S. border has fallen significantly.

In October 2014, 1,551 unaccompanied minors were apprehended at the Rio Grande Sector compared to 2,652 in October 2013, a 42 percent reduction year on year. However, in the same geographic sector the number of family unit apprehensions increased by 6 percent over the same period.[2] The numbers indicate that a significantly reduced number of unaccompanied children are reaching the southwest border, but mothers and their young children continue to move northward.

Most arrive in search of a parent or close family member. According to a survey carried out by the UN High Commission for Refugees, 48 percent claim that violence in their community forces them to flee. A further 21 percent of the children surveyed claimed abuse and violence from a caretaker in their home.[3] Others seek better economic opportunities, and many claim a combination of all three factors. The State Department recognized that the violence from criminal gangs in the three sending countries, together with the presence of a parent in the United States, provided adequate basis for determining whether the minor was eligible for refugee status, and failing that parole status.

Refugee status

A parent who is legally in the United States can initiate the petition for the minor child or children as refugees with the help of a designated resettlement agency. (A broad range of these agencies are already registered with the State Department’s Bureau of Population, Refugees and Migration to help resettle refugees in the United States) A more limited number of designated agencies will be announced to work with Central American petitioners by the end of November. With the help of the agency, the parent legally in the United States will complete a State Department form DS-7699. He or she can also petition for the other parent of the child so long as they are currently married to each other. As part of the petition process, the designated agency will help the U.S. parent submit to DNA testing to confirm biological relationship with the minor child.

In the three Central American countries, the UN’s International Organization for Migration will manage the process by contacting each child and inviting them to a pre-screening interview. The published purpose is to prepare the child for a refugee interview with a DHS official, but we must assume that it is also intended to weed out minors who fail to meet the basic requirements.

With DNA establishing a parental relationship, the child proceeds to an interview with a DHS official in their home country. This is the critical test because DHS will establish whether the child has grounds for refugee status based upon “a well-founded fear of being persecuted for reasons of race, religion, nationality, membership of a particular social group or political opinion.” The most credible fear for these children is “membership of a particular social group” such that gang members seek to recruit, prostitute or harm them if they refuse to join, or align under pressure with the opposing illicit gang.

Parole status

Should the child not qualify for refugee status, he or she can apply for parole based on a DHS finding that the “individual is at risk of harm, clears all background vetting, there is no serious derogatory information and someone has committed to financially support the individual while in the United States.”[4]

These conditions are not onerous and are intended to protect children from violence, abuse and neglect. Parole does not give the child permanent immigration status or a path to the same. Nor are parolees eligible for medical and other benefits beyond schooling and the right to work. However, the parolee can remain in the United States for two years and may extend that period thereafter.

For those children with legal counsel, a legitimate fear of sexual harassment, bodily harm from gangs or intra-family feuds can often be established, but for those children without counsel and over anxious in the interview with a U.S. official, the grant of parole status is the more likely outcome. We should therefore expect more children to qualify as parolees – entering on a temporary basis rather than permanent refugees.

Ceiling to the number of refugees

Currently 4,000 refugees may enter the U.S. from Latin America and the Caribbean in the fiscal year 2014 to 2015. Given the 61,705 unaccompanied minors detained by Customs and Border Patrol in FY 2014, the current quota will not be sufficient to meet the needs of those who qualify as refugees. Therefore, we should support lifting the current ceiling to accommodate the anticipated larger number of petitioners for refugee status from three northern Central American nations. There is no limit on the number of parolees that may enter the United States in any one year.

The speed with which both State and DHS reached agreement on processing petitioners for refugee and parole status in their respective countries indicates an admirable capacity to adapt. DHS Secretary, Jeh Johnson’s seven visits to the southwest border this year and his interaction with the children have encouraged him to act judiciously and relatively fast. He reflects American compassion toward these children, and often their mothers, who risk so much to join a parent in the United States. The program recognizes that there is a war in Central America and the respective states are incapable of protecting their young citizens from gangs and organized crime. This program responds to Emma Lazarus’ poem engraved in the bronze plaque at the pedestal of the Statute of Liberty:

The government of Peña Nieto changed the national discourse on organized crime and violence in Mexico. It requested that the media banish homicides from its front pages in order to calm citizens' anxieties and assure foreign investors that the government held control over insecurity. The means to assert this control transferred greater autonomy to the armed forces, as well as to state and municipal police, institutions lacking appropriate training for law enforcement. In September 2014, both the armed forces and the municipal police are alleged to have killed and caused the disappearance of groups of citizens. These violent acts, as well as the murder of prominent politicians, have raised the specter that a new level of violence has returned to Mexico – this time carried out by official bodies as well as organized crime.

Allegations Against the Armed Forces and Local Police

On July 29, Secretary of the Interior Osorio Chong announced that “violence has been reduced to its minimum expression.”[1] He chose to ignore the fact that one month earlier members of the armed forces had killed 22 people. In late September, the secretary of defense admitted that military elements in Tlatlaya (located in the State of Mexico), had carried out the homicides. Photographs of 19 of those bodies show that they were shot while kneeling in the dirt from a range of 30 to 50 centimeters.

In the state of Veracruz, students marched in late September to protest the military and the police’s use of excessive force against, so-called organized criminals. On September 29, in the town of Iguala, the attorney general for the state of Guerrero, Iñaky Blanco Cabrera, announced that he had begun investigations into police slaying of three students, two passengers and a passerby in an incident concerning the football team, Los Avispones, as it was bussed to its game. Ballistic tests showed that members of the municipal police had shot into the bus. Separately, Iñaky Blanco also admitted that municipal police had shot at students from the radical teacher training school, Ayotzinapa Normal, who were also moving out of Iguala in three busses. Forty-three of those students disappeared on September 26, 20 to 30 of whom are believed to have been arrested and taken to an unknown location. Since that time, they have not been found. On Sunday, September 28, the state leader of the conservative party, PAN (National Action Party), was murdered. The purported massacres and disappearances, allegedly at the hands of the military and local police have raised alarm bells in Mexico.

Past and Present PRI Policies

The distinction between the six years of violence against drug cartels under President Felipe Calderón and now is that Mexico’s armed forces as well as municipal and state police are accused and, in several cases, found guilty of carrying out the crimes. The state has assumed the role as guardian of public order and in so doing has carried out widespread abuses of citizens' human rights. Students, struggling to find jobs commensurate with their professional studies, are demonstrating throughout the country in support of the 43 missing and presumed dead Ayotzinapa students. Today, students throwing bricks at glass buildings make up front page stories.

In citizens' minds, the coincidence of timing reminds them of October 2, 1968, when thousands of students gathered in protest in the plaza of Tlatelolco, as well as within the Escuela Normal, the most prestigious high school in Mexico City. Approximately 300 died or disappeared. At that time, the students were accused of Marxist Leninist tendencies and President Echeverría’s minister of interior ordered their suppression. The vivid memory of that period lives on among a generation who now qualify for a pension. The PRI (Institutional Revolutionary Party) government of 46 years ago was authoritarian, centralized and abhorred protest that might destabilize the country.

Today, a new PRI government has returned to power after 12 years in opposition. With pride, party leaders assert that strong governance to protect citizen security has returned. Journalists are threatened by drug cartels. State and local officials pressure them into publishing bland reports, usually based on police statements. As a result, self-censorship is becoming the norm. A reading of newspaper articles regarding the Tlatlaya and Iguala killings requires the reader to rely upon the statements of state prosecutors, the mayor’s office and the press officer for Mexico’s armed forces. Searches for stories from victims' families and witnesses are not to be found in the mainstream press. Fortunately, opinion makers are free to publish and continue to provide effective freedom of expression, but otherwise Mexico’s media is seriously restrained in what it publishes.

The Human Rights Commission has become a puppet of Mexico's Ministry of Interior. It took weeks before it decided to investigate the Tlatlaya killings at the hands of the military and its report is still not finished. A vocal defender of human rights was asked to leave the commission, her term of office terminated prematurely.

An Increasingly Skeptical Public

The government of Peña Nieto is determined to rebuild confidence in the state’s capacity to keep people safe and to assure foreign investors that Mexico is open for business. The government’s much respected statistical office, INEGI (National Institute of Statistics and Geography), was required to publish intentional homicide numbers without waiting for the customary review period. As a result, Osorio Chong’s announcement on July 29 that homicides related to organized crime had fallen by close to 30 percent year on year was received with askance by citizens who suffer the widespread extortion and consequential brutality on a regular basis. Disappearances are now common and investigations rare. This has led the Catholic Church and religious leaders to join the demands of family members for information into the whereabouts of their loved ones.

In a world of social media, it is foolish to believe that the government can clamp down on news that it finds unacceptable. The old-time leaders of the PRI may remember how they used to limit the diffusion of unsavory stories, but their grandchildren can share with them narratives and images of daily occurrences gathered through the internet. The Mexican government may be unusually skilled in propaganda, but it cannot hide incidents of insecurity from its citizens.

The events of September 2014 are a wakeup call to both Mexican citizens and their government. Members of the armed forces can no longer impose vigilante justice against 22 men and women, even if they are suspected of membership in La Familia’s drug cartel. Municipal police can no longer cause 43 students to disappear despite the suspicion of vandalism. An increasingly skeptical nation, as well as outside observers, watches the repression of Mexican citizens with growing concern.

If the Mexican state is to be trusted, its officers must carry out their functions with respect for the law. If the state abuses its authority, organized criminal gangs which trade in illicit drugs and people, will emerge the winners because their criminal acts can be attributed easily to public officials. Despite government assurances, Mexican citizens do not know whom to fear more: criminals or state protected officers. This is a sad condition for Mexico, but one that can be corrected. Peña Nieto and his government have announced that they will prosecute and punish identified military and police personnel, but the legal process must be transparent and the sanction must comply fully with the pertinent laws.

Authors

The government of Peña Nieto changed the national discourse on organized crime and violence in Mexico. It requested that the media banish homicides from its front pages in order to calm citizens' anxieties and assure foreign investors that the government held control over insecurity. The means to assert this control transferred greater autonomy to the armed forces, as well as to state and municipal police, institutions lacking appropriate training for law enforcement. In September 2014, both the armed forces and the municipal police are alleged to have killed and caused the disappearance of groups of citizens. These violent acts, as well as the murder of prominent politicians, have raised the specter that a new level of violence has returned to Mexico – this time carried out by official bodies as well as organized crime.

Allegations Against the Armed Forces and Local Police

On July 29, Secretary of the Interior Osorio Chong announced that “violence has been reduced to its minimum expression.”[1] He chose to ignore the fact that one month earlier members of the armed forces had killed 22 people. In late September, the secretary of defense admitted that military elements in Tlatlaya (located in the State of Mexico), had carried out the homicides. Photographs of 19 of those bodies show that they were shot while kneeling in the dirt from a range of 30 to 50 centimeters.

In the state of Veracruz, students marched in late September to protest the military and the police’s use of excessive force against, so-called organized criminals. On September 29, in the town of Iguala, the attorney general for the state of Guerrero, Iñaky Blanco Cabrera, announced that he had begun investigations into police slaying of three students, two passengers and a passerby in an incident concerning the football team, Los Avispones, as it was bussed to its game. Ballistic tests showed that members of the municipal police had shot into the bus. Separately, Iñaky Blanco also admitted that municipal police had shot at students from the radical teacher training school, Ayotzinapa Normal, who were also moving out of Iguala in three busses. Forty-three of those students disappeared on September 26, 20 to 30 of whom are believed to have been arrested and taken to an unknown location. Since that time, they have not been found. On Sunday, September 28, the state leader of the conservative party, PAN (National Action Party), was murdered. The purported massacres and disappearances, allegedly at the hands of the military and local police have raised alarm bells in Mexico.

Past and Present PRI Policies

The distinction between the six years of violence against drug cartels under President Felipe Calderón and now is that Mexico’s armed forces as well as municipal and state police are accused and, in several cases, found guilty of carrying out the crimes. The state has assumed the role as guardian of public order and in so doing has carried out widespread abuses of citizens' human rights. Students, struggling to find jobs commensurate with their professional studies, are demonstrating throughout the country in support of the 43 missing and presumed dead Ayotzinapa students. Today, students throwing bricks at glass buildings make up front page stories.

In citizens' minds, the coincidence of timing reminds them of October 2, 1968, when thousands of students gathered in protest in the plaza of Tlatelolco, as well as within the Escuela Normal, the most prestigious high school in Mexico City. Approximately 300 died or disappeared. At that time, the students were accused of Marxist Leninist tendencies and President Echeverría’s minister of interior ordered their suppression. The vivid memory of that period lives on among a generation who now qualify for a pension. The PRI (Institutional Revolutionary Party) government of 46 years ago was authoritarian, centralized and abhorred protest that might destabilize the country.

Today, a new PRI government has returned to power after 12 years in opposition. With pride, party leaders assert that strong governance to protect citizen security has returned. Journalists are threatened by drug cartels. State and local officials pressure them into publishing bland reports, usually based on police statements. As a result, self-censorship is becoming the norm. A reading of newspaper articles regarding the Tlatlaya and Iguala killings requires the reader to rely upon the statements of state prosecutors, the mayor’s office and the press officer for Mexico’s armed forces. Searches for stories from victims' families and witnesses are not to be found in the mainstream press. Fortunately, opinion makers are free to publish and continue to provide effective freedom of expression, but otherwise Mexico’s media is seriously restrained in what it publishes.

The Human Rights Commission has become a puppet of Mexico's Ministry of Interior. It took weeks before it decided to investigate the Tlatlaya killings at the hands of the military and its report is still not finished. A vocal defender of human rights was asked to leave the commission, her term of office terminated prematurely.

An Increasingly Skeptical Public

The government of Peña Nieto is determined to rebuild confidence in the state’s capacity to keep people safe and to assure foreign investors that Mexico is open for business. The government’s much respected statistical office, INEGI (National Institute of Statistics and Geography), was required to publish intentional homicide numbers without waiting for the customary review period. As a result, Osorio Chong’s announcement on July 29 that homicides related to organized crime had fallen by close to 30 percent year on year was received with askance by citizens who suffer the widespread extortion and consequential brutality on a regular basis. Disappearances are now common and investigations rare. This has led the Catholic Church and religious leaders to join the demands of family members for information into the whereabouts of their loved ones.

In a world of social media, it is foolish to believe that the government can clamp down on news that it finds unacceptable. The old-time leaders of the PRI may remember how they used to limit the diffusion of unsavory stories, but their grandchildren can share with them narratives and images of daily occurrences gathered through the internet. The Mexican government may be unusually skilled in propaganda, but it cannot hide incidents of insecurity from its citizens.

The events of September 2014 are a wakeup call to both Mexican citizens and their government. Members of the armed forces can no longer impose vigilante justice against 22 men and women, even if they are suspected of membership in La Familia’s drug cartel. Municipal police can no longer cause 43 students to disappear despite the suspicion of vandalism. An increasingly skeptical nation, as well as outside observers, watches the repression of Mexican citizens with growing concern.

If the Mexican state is to be trusted, its officers must carry out their functions with respect for the law. If the state abuses its authority, organized criminal gangs which trade in illicit drugs and people, will emerge the winners because their criminal acts can be attributed easily to public officials. Despite government assurances, Mexican citizens do not know whom to fear more: criminals or state protected officers. This is a sad condition for Mexico, but one that can be corrected. Peña Nieto and his government have announced that they will prosecute and punish identified military and police personnel, but the legal process must be transparent and the sanction must comply fully with the pertinent laws.

Authors

]]>
http://www.brookings.edu/research/articles/2014/08/14-mexico-energy-law-negroponte?rssid=negroponted{EC7A1A09-798E-418B-B542-61F68BB6CAFF}http://webfeeds.brookings.edu/~/71953238/0/brookingsrss/experts/negroponted~Mexico%e2%80%99s-Energy-Reforms-Become-LawMexico’s Energy Reforms Become Law

On August 11, 2014, President Peña Nieto signed into law the 21 component parts of a comprehensive energy reform. Eight months after introducing constitutional amendments to radically transform Mexico’s hydrocarbon and electricity sectors, private investors and Petróleos Mexicanos (PEMEX) can leave the starting gate.

Peña Nieto was among the first to make the dash, announcing that he would speed up the creation of a new power-grid and advance the date for declaring which fields would be available for bidding by private and foreign companies. In signing, he announced that "This is the moment to put the energy reform into action."

Passage and signature of the secondary, or implementing, laws address critical issues that were important both to PEMEX and to private investors seeking to invest in Mexico’s hydrocarbon potential.[1] Investors now have detailed elements of the new fiscal regime that will impact any contracts with PEMEX, as well as bids for production sharing contracts, known as "asignaciones," with the Mexican government. The oil industry has responded positively, giving a “fairly pro-market” grade to the new regime. Furthermore, PEMEX acquires a legal framework that enables it to become a competitive and productive national oil company.

Since the secondary laws were introduced into the Senate on April 30, 2014, intense discussions have taken place with both potential investors and PEMEX. Total S.A. demonstrated early interest by agreeing to strengthen its technical cooperation with PEMEX. Pacific Rubiales, Latin America’s largest non-state hydrocarbon producer, noted its intention to be among the first oil companies to sign on. Noble Energy, a U.S. independent with 70 years experience in global exploration and production, expressed interest in contracting with PEMEX for deep-water exploitation in the Gulf of Mexico. Meantime, PEMEX shared with the government the list of projects, known as Round Zero, that it wished to continue developing either alone or in joint ventures with private entities. The Round Zero was due to be published on September 15, but in signing the legislation, Peña Nieto advanced that date to the week of August 18. PEMEX directors are eager to follow up the expressions of commercial interest and begin to contract with service providers for the development of Mexico’s estimated 10.073 billion barrels of proven reserves of crude oil.[2]

The viability of PEMEX is critical to the success of this reform because the government cannot succeed in these radical changes without the buy-in of an institution which holds both national and historical significance for Mexican citizens. PEMEX was created to replace the U.S. and British oil companies of 1938. In the intervening 76 years it has faced constitutional constraints from working with international oil companies and taking advantage of the technology and finance available to owners of significant proven oil and gas reserves.

Two categories of critical issues can be distinguished in the implementing laws, namely the tax and financial obligations; and second, the governance and political responsibilities.

Tax and Financial Obligations

First, the fiscal regime for international oil companies (IOCs) and service providers is intended to attract their investment and participation. The Mexican regime maintains flexible rates for royalties, as well as for oil and gas taxes. Differentiating between royalties, corporate tax and cost deductions, the implementing legislation provides the following:

• Royalties: The Senate has agreed that sliding-scale royalties will exist with varying rates according to the type of field, its production and the price of oil and gas. A royalty discount will exist for the production of shale gas where profits are narrower. Royalty rates will rise if production or price goes above a certain threshold.[3] The exact amount will only be known when the contracts are drafted. Royalties will be paid to the Mexican Petroleum Fund a trust fund designed for long term savings.

• Corporate income tax: The standard 30 percent corporate tax will apply to all investors, including PEMEX. This tax will continue to be paid to the Ministry of Finance.

Second, PEMEX’s cumbersome fiscal regime is simplified. Instead of income tax plus 10 additional taxes, the law follows international practice and establishes income tax plus three additional taxes. These will apply to asignaciones, and contracts with PEMEX:

• Taxes upon the extraction of hydrocarbons are based on a sliding scale, depending upon the international price of hydrocarbons. The law
specifies a monthly tax of $450/km2.[4]

• Taxes for the exploration of hydrocarbons, known as surface rental fees, are lower at $110/km2 in order to incentivize companies to fulfill their exploration plans within a specified time frame.

Third, cost deductions are capped at $6.5 for each barrel of oil produced. In the case of the asignaciones, a cap of 12.5 percent of oil revenue exists for onshore and shallow water. A cap of 60 percent of oil revenue will exist for deep water production and for the Chicontepec field with its geological difficulties. A cap of 80 percent of gas and condensate revenue will also apply. For PEMEX this increases significantly their permitted deductions and allows it to compete with IOCs “nearly” on an equal basis.[5] As a consequence of the changes to this fiscal regime, PEMEX anticipates paying 36 percent less in taxes and royalties each year. This is anticipated to reduce PEMEX tax liability from $5.2 billion in 2012 to $1.896 billion each year for the next five years beginning in 2015. This permits the state-owned oil company to invest in fields which previously were not profitable for lack of technology, as well as provide for the training of petroleum engineers, acquisition of equipment and development of new fields. PEMEX should now have the capacity to increase its oil production.

In theory, over the next five years the Secondary laws establish that PEMEX will contribute to the Ministry of Finance 11 percent less tax than its high average of 69 percent of total income. On paper, PEMEX’s tax rates are reduced, but elsewhere in the reformed laws, the Ministry of Finance retains the right to adjust tax rates to ensure sufficient revenue for public expenditures.[6] Thus, despite claims that PEMEX will be treated as an autonomous, productive and competitive company, the government could continue to draw on the state oil company’s profits for national purposes. This could severely constrain PEMEX's long term investment plans.

Fourth, the secondary laws providedetails on how income from the asignaciones (production sharing contracts) for the exploration and extraction of hydrocarbons shall go to the Mexican Petroleum Fund. This fund will act as a bank, or sovereign wealth fund, in parallel with the Ministry of Finance. The directors of this fund must ensure that sufficient monies are transferred to the ministry so as to assure that the national treasury enriched by hydrocarbons does not fall below 4.9 percent of Mexico’s GDP. Furthermore, after payments to the Ministry of Finance, if and when the Petroleum Fund’s income rises above 3 percent of GDP, the fund will recommend to Mexico’s Chamber of Deputies how the excess should be distributed, or saved. As in the case of the Norwegian Pension Fund, we should expect the Petroleum Fund to focus on the long term economic benefits for Mexico and avoid rapid depletion to meet immediate needs.

Fifth, the law reforms PEMEX pension fund liabilities. Liability for PEMEX’s pension fund has produced a burden that could have limited the company’s capacity to emerge as a profitable entity. In conjunction with the passage of the secondary laws, the government has proposed to assume one third of PEMEX’s liability for the labor and social responsibilities of its 15,000 employees. According to the Ministry of Finance, these obligations amounted to $127 billion and equaled 49.8 percent of PEMEX overall debt. In terms of pension benefits, a PEMEX worker retiring at 55 years old was entitled to half his salary, life insurance and free medical care that covered the worker and his spouse. This was calculated to amount to 18,000 pesos, or $1,353 per month.

Three conditions exist before the government will assume PEMEX pension obligations:

PEMEX must enter into negotiations with the Union of Petroleum Workers (STPRM) to raise the retirement age from 55 to 65 years, equivalent to the age of other retiring Mexican government employees.

The union must agree that its pension fund will be audited on an annual basis and criminal sanctions applied for fraudulent payments.

The reform of the pension scheme anticipates transition from a defined benefit plan to defined contribution, or individual accounts for PEMEX workers.

At this point it is hard to anticipate the difficulties presented by these conditions. Senator Carlos Romero Deschamps, the current head of the Sindicato de Trabajadores Petroleros de la República Mexicana (STPRM, or the Union of Oil Workers of the Mexican Republic) was not in the chamber when the final vote to approve the energy laws took place. (He also announced that he would not run for the Senate at the next elections.) However, negotiations and changes to the pension fund should not affect the implementation of both the hydrocarbons and electricity reforms.

Governance and Political Responsibilities

To implement the hydrocarbon reforms, three major institutions have to reach agreement: the Ministry of Finance, the Ministry of Energy and the newly created Comisión Nacional de Hidrocarburos (CNH, or National Hydrocarbons Commission). This could prove to be challenging. Finance is the most important ministry within the Mexican government; it establishes the tax and royalty rates and holds those payments. Energy acquires new authorities which should strengthen its relative weakness in relation to PEMEX and, among the new regulatory bodies, CNH is yet to be tested. It will have responsibility for the technical matters in both designing contracts and the bidding process. These three agencies will determine the revenues and taxes, criteria for bids, allocation of projects and distribution of the income stream from the reformed hydrocarbon sector. Important changes to both the powers of the Energy Ministry, as well as the CNH are made in the law which should strengthen capacity to act independently and effectively. Also, the newly created Mexican Petroleum Fund will play an important role in determining the use of funds collected from asignaciones. The structure and coordination among all four institutions is built upon the assumption that new investments from international oil companies and independents will provide significant additional revenues for the Mexican government.

Furthermore, PEMEX as the reformed state oil company has a critical role to play. PEMEX’s historical role as the defender of the national petroleum resource has the capacity either to encourage support for the reform, or to act as a laggard making service contracts and joint venture agreement bureaucratic and unnecessarily lengthy. It was thus critical for the legislatures to meet most of PEMEX’s demands and ensure the long-term viability of the emerging state oil company.

The level of national content produced in Mexico and committed to each project had been of serious concern to foreign observers who considered that it was too high. The issue is now resolved satisfactorily by emphasizing flexibility in determining "national content." Until 2025, Mexican national content will equal 25 percent of the assets, a percentage that can vary between zero national content for complex deep-water projects to higher national content—in excess of 25 percent—for shallow offshore and onshore basins. These include the Southeast basin, Mexico’s most productive area, where PEMEX intends to produce an estimated 12.3 billion barrels of oil equivalent.

After 2025, the energy law prescribes that national content shall rise to 35 percent based on two presumptions: significant private investment from Mexican and foreign companies, and reduced dependence upon foreign sources for technology and management. We might assume that if private investment proves to be insufficient and dependence on foreign sources endures, commencement of the 35 percent national content can be postponed.

Development of shale deposits in the Burgos basin which abuts the U.S. fields at Eagle Ford will require significant infrastructure and Mexican government support. The reason is that Mexico’s north eastern, sparse and dry area will be changed dramatically with the management of water, construction of roads, housing, medical and educational facilities, electrical generation and provision of public safety. In the current absence of local governments to regulate behavior, there is considerable doubt as to the short term economic viability of shale projects in the Burgos basin. Consequently, PEMEX has indicated that it will pursue only 10 test wells in this area at this time.

Environmental concerns may also limit the development of the Macuspana basin which lies beneath sensitive wetlands. PEMEX is not likely to pursue exploitation of gas in this area and local citizens are expected to protest development.

Assurances and appropriate compensation for holders of communal and privately held lands may prove to be the most contentious issue. Landowners from the Burgos basin, as well as "campesino" farmers from the center and eastern parts of Mexico have demonstrated throughout the country seeking assurances that they will not be driven off their land and that compensation will be appropriate. Mexico's Permanent Congress of Agrarian people is contesting the energy reform and is committed to continue protests which may include a case before the Mexican Supreme Court. Campesino farmers hold a special place in Mexican life; they help citizens recall the decade long revolutionary struggle. Consequently, they form the backbone of the leftist party, the Partido de la Revolución Democrática (PRD, or Party of the Democratic Revolution), which continues to oppose the energy reforms.

The secondary laws establish that compensation must be based upon negotiation between the parties based on market forces. Also, the law gives preference to the need to exploit the hydrocarbon resources over other uses. This is likely to result in local conflicts. Although PEMEX has experience in negotiating with indigenous communities in the tight sands of the Chicontepec region, other private enterprises may be reluctant to assert their legal rights in the face of local protest. PEMEX developed a cadre of experienced social workers to engage with each of the communities throughout Chicontepec. Therefore, it would be advisable to enter into joint ventures with PEMEX for the development of onshore fields where the potential for social conflict with local communities exists.

Going Forward

The next stage is for the Ministry of Energy to reveal the list of offshore and onshore fields that PEMEX wishes to develop itself or in joint ventures. This could be published as early as the week of August 18. The Energy Minister will decide which blocs PEMEX keeps and which blocs must be released; decisions with both technical and political consequences. PEMEX is already in preliminary discussions with potential joint venture partners and the opportunities for joint production, as well as service contracts in the upstream sector, will be plentiful. However, it remains to be seen how the Energy Ministry, together with theCNH manage the numerous bids. The timetable and the auction process have yet to be announced thus adding a layer of uncertainty for any future contracts. The commitment of the Mexican ministries and regulatory bodies to transparency is key; a process required by law but complex in its application. International investors may judge the management of the initial bidding process as indicative of what lies ahead when exploration and production in off shore fields, as well as shale basins become available through asignaciones in the first half of 2015.

Enactment of the energy reforms has two important implications: President Peña Nieto’s determination to balance the interests of potential investors versus the ongoing viability of PEMEX, and the success of the reforms measured by increased production and greater revenues for the government. To accomplish both, the drafters of the legislation have consulted widely to determine the best international practice. The government has publicly announced that it has learned from the experiences of Angola, Brazil, China, Nigeria and others with high petroleum reserves. The new fiscal regime is taken from the experience of other newly industrialized countries. The intent is to avoid mistakes. Reforming the energy sector is the jewel in Peña Nieto’s reform process and it must not be derailed. This is a defining moment for Mexico as it enters the global age of technological advantage and commits to raising the monies from foreign investors to pursue the development of infrastructure, quality education and social progress for its citizens.

Authors

On August 11, 2014, President Peña Nieto signed into law the 21 component parts of a comprehensive energy reform. Eight months after introducing constitutional amendments to radically transform Mexico’s hydrocarbon and electricity sectors, private investors and Petróleos Mexicanos (PEMEX) can leave the starting gate.

Peña Nieto was among the first to make the dash, announcing that he would speed up the creation of a new power-grid and advance the date for declaring which fields would be available for bidding by private and foreign companies. In signing, he announced that "This is the moment to put the energy reform into action."

Passage and signature of the secondary, or implementing, laws address critical issues that were important both to PEMEX and to private investors seeking to invest in Mexico’s hydrocarbon potential.[1] Investors now have detailed elements of the new fiscal regime that will impact any contracts with PEMEX, as well as bids for production sharing contracts, known as "asignaciones," with the Mexican government. The oil industry has responded positively, giving a “fairly pro-market” grade to the new regime. Furthermore, PEMEX acquires a legal framework that enables it to become a competitive and productive national oil company.

Since the secondary laws were introduced into the Senate on April 30, 2014, intense discussions have taken place with both potential investors and PEMEX. Total S.A. demonstrated early interest by agreeing to strengthen its technical cooperation with PEMEX. Pacific Rubiales, Latin America’s largest non-state hydrocarbon producer, noted its intention to be among the first oil companies to sign on. Noble Energy, a U.S. independent with 70 years experience in global exploration and production, expressed interest in contracting with PEMEX for deep-water exploitation in the Gulf of Mexico. Meantime, PEMEX shared with the government the list of projects, known as Round Zero, that it wished to continue developing either alone or in joint ventures with private entities. The Round Zero was due to be published on September 15, but in signing the legislation, Peña Nieto advanced that date to the week of August 18. PEMEX directors are eager to follow up the expressions of commercial interest and begin to contract with service providers for the development of Mexico’s estimated 10.073 billion barrels of proven reserves of crude oil.[2]

The viability of PEMEX is critical to the success of this reform because the government cannot succeed in these radical changes without the buy-in of an institution which holds both national and historical significance for Mexican citizens. PEMEX was created to replace the U.S. and British oil companies of 1938. In the intervening 76 years it has faced constitutional constraints from working with international oil companies and taking advantage of the technology and finance available to owners of significant proven oil and gas reserves.

Two categories of critical issues can be distinguished in the implementing laws, namely the tax and financial obligations; and second, the governance and political responsibilities.

Tax and Financial Obligations

First, the fiscal regime for international oil companies (IOCs) and service providers is intended to attract their investment and participation. The Mexican regime maintains flexible rates for royalties, as well as for oil and gas taxes. Differentiating between royalties, corporate tax and cost deductions, the implementing legislation provides the following:

• Royalties: The Senate has agreed that sliding-scale royalties will exist with varying rates according to the type of field, its production and the price of oil and gas. A royalty discount will exist for the production of shale gas where profits are narrower. Royalty rates will rise if production or price goes above a certain threshold.[3] The exact amount will only be known when the contracts are drafted. Royalties will be paid to the Mexican Petroleum Fund a trust fund designed for long term savings.

• Corporate income tax: The standard 30 percent corporate tax will apply to all investors, including PEMEX. This tax will continue to be paid to the Ministry of Finance.

Second, PEMEX’s cumbersome fiscal regime is simplified. Instead of income tax plus 10 additional taxes, the law follows international practice and establishes income tax plus three additional taxes. These will apply to asignaciones, and contracts with PEMEX:

• Taxes upon the extraction of hydrocarbons are based on a sliding scale, depending upon the international price of hydrocarbons. The law
specifies a monthly tax of $450/km2.[4]

• Taxes for the exploration of hydrocarbons, known as surface rental fees, are lower at $110/km2 in order to incentivize companies to fulfill their exploration plans within a specified time frame.

Third, cost deductions are capped at $6.5 for each barrel of oil produced. In the case of the asignaciones, a cap of 12.5 percent of oil revenue exists for onshore and shallow water. A cap of 60 percent of oil revenue will exist for deep water production and for the Chicontepec field with its geological difficulties. A cap of 80 percent of gas and condensate revenue will also apply. For PEMEX this increases significantly their permitted deductions and allows it to compete with IOCs “nearly” on an equal basis.[5] As a consequence of the changes to this fiscal regime, PEMEX anticipates paying 36 percent less in taxes and royalties each year. This is anticipated to reduce PEMEX tax liability from $5.2 billion in 2012 to $1.896 billion each year for the next five years beginning in 2015. This permits the state-owned oil company to invest in fields which previously were not profitable for lack of technology, as well as provide for the training of petroleum engineers, acquisition of equipment and development of new fields. PEMEX should now have the capacity to increase its oil production.

In theory, over the next five years the Secondary laws establish that PEMEX will contribute to the Ministry of Finance 11 percent less tax than its high average of 69 percent of total income. On paper, PEMEX’s tax rates are reduced, but elsewhere in the reformed laws, the Ministry of Finance retains the right to adjust tax rates to ensure sufficient revenue for public expenditures.[6] Thus, despite claims that PEMEX will be treated as an autonomous, productive and competitive company, the government could continue to draw on the state oil company’s profits for national purposes. This could severely constrain PEMEX's long term investment plans.

Fourth, the secondary laws providedetails on how income from the asignaciones (production sharing contracts) for the exploration and extraction of hydrocarbons shall go to the Mexican Petroleum Fund. This fund will act as a bank, or sovereign wealth fund, in parallel with the Ministry of Finance. The directors of this fund must ensure that sufficient monies are transferred to the ministry so as to assure that the national treasury enriched by hydrocarbons does not fall below 4.9 percent of Mexico’s GDP. Furthermore, after payments to the Ministry of Finance, if and when the Petroleum Fund’s income rises above 3 percent of GDP, the fund will recommend to Mexico’s Chamber of Deputies how the excess should be distributed, or saved. As in the case of the Norwegian Pension Fund, we should expect the Petroleum Fund to focus on the long term economic benefits for Mexico and avoid rapid depletion to meet immediate needs.

Fifth, the law reforms PEMEX pension fund liabilities. Liability for PEMEX’s pension fund has produced a burden that could have limited the company’s capacity to emerge as a profitable entity. In conjunction with the passage of the secondary laws, the government has proposed to assume one third of PEMEX’s liability for the labor and social responsibilities of its 15,000 employees. According to the Ministry of Finance, these obligations amounted to $127 billion and equaled 49.8 percent of PEMEX overall debt. In terms of pension benefits, a PEMEX worker retiring at 55 years old was entitled to half his salary, life insurance and free medical care that covered the worker and his spouse. This was calculated to amount to 18,000 pesos, or $1,353 per month.

Three conditions exist before the government will assume PEMEX pension obligations:

PEMEX must enter into negotiations with the Union of Petroleum Workers (STPRM) to raise the retirement age from 55 to 65 years, equivalent to the age of other retiring Mexican government employees.

The union must agree that its pension fund will be audited on an annual basis and criminal sanctions applied for fraudulent payments.

The reform of the pension scheme anticipates transition from a defined benefit plan to defined contribution, or individual accounts for PEMEX workers.

At this point it is hard to anticipate the difficulties presented by these conditions. Senator Carlos Romero Deschamps, the current head of the Sindicato de Trabajadores Petroleros de la República Mexicana (STPRM, or the Union of Oil Workers of the Mexican Republic) was not in the chamber when the final vote to approve the energy laws took place. (He also announced that he would not run for the Senate at the next elections.) However, negotiations and changes to the pension fund should not affect the implementation of both the hydrocarbons and electricity reforms.

Governance and Political Responsibilities

To implement the hydrocarbon reforms, three major institutions have to reach agreement: the Ministry of Finance, the Ministry of Energy and the newly created Comisión Nacional de Hidrocarburos (CNH, or National Hydrocarbons Commission). This could prove to be challenging. Finance is the most important ministry within the Mexican government; it establishes the tax and royalty rates and holds those payments. Energy acquires new authorities which should strengthen its relative weakness in relation to PEMEX and, among the new regulatory bodies, CNH is yet to be tested. It will have responsibility for the technical matters in both designing contracts and the bidding process. These three agencies will determine the revenues and taxes, criteria for bids, allocation of projects and distribution of the income stream from the reformed hydrocarbon sector. Important changes to both the powers of the Energy Ministry, as well as the CNH are made in the law which should strengthen capacity to act independently and effectively. Also, the newly created Mexican Petroleum Fund will play an important role in determining the use of funds collected from asignaciones. The structure and coordination among all four institutions is built upon the assumption that new investments from international oil companies and independents will provide significant additional revenues for the Mexican government.

Furthermore, PEMEX as the reformed state oil company has a critical role to play. PEMEX’s historical role as the defender of the national petroleum resource has the capacity either to encourage support for the reform, or to act as a laggard making service contracts and joint venture agreement bureaucratic and unnecessarily lengthy. It was thus critical for the legislatures to meet most of PEMEX’s demands and ensure the long-term viability of the emerging state oil company.

The level of national content produced in Mexico and committed to each project had been of serious concern to foreign observers who considered that it was too high. The issue is now resolved satisfactorily by emphasizing flexibility in determining "national content." Until 2025, Mexican national content will equal 25 percent of the assets, a percentage that can vary between zero national content for complex deep-water projects to higher national content—in excess of 25 percent—for shallow offshore and onshore basins. These include the Southeast basin, Mexico’s most productive area, where PEMEX intends to produce an estimated 12.3 billion barrels of oil equivalent.

After 2025, the energy law prescribes that national content shall rise to 35 percent based on two presumptions: significant private investment from Mexican and foreign companies, and reduced dependence upon foreign sources for technology and management. We might assume that if private investment proves to be insufficient and dependence on foreign sources endures, commencement of the 35 percent national content can be postponed.

Development of shale deposits in the Burgos basin which abuts the U.S. fields at Eagle Ford will require significant infrastructure and Mexican government support. The reason is that Mexico’s north eastern, sparse and dry area will be changed dramatically with the management of water, construction of roads, housing, medical and educational facilities, electrical generation and provision of public safety. In the current absence of local governments to regulate behavior, there is considerable doubt as to the short term economic viability of shale projects in the Burgos basin. Consequently, PEMEX has indicated that it will pursue only 10 test wells in this area at this time.

Environmental concerns may also limit the development of the Macuspana basin which lies beneath sensitive wetlands. PEMEX is not likely to pursue exploitation of gas in this area and local citizens are expected to protest development.

Assurances and appropriate compensation for holders of communal and privately held lands may prove to be the most contentious issue. Landowners from the Burgos basin, as well as "campesino" farmers from the center and eastern parts of Mexico have demonstrated throughout the country seeking assurances that they will not be driven off their land and that compensation will be appropriate. Mexico's Permanent Congress of Agrarian people is contesting the energy reform and is committed to continue protests which may include a case before the Mexican Supreme Court. Campesino farmers hold a special place in Mexican life; they help citizens recall the decade long revolutionary struggle. Consequently, they form the backbone of the leftist party, the Partido de la Revolución Democrática (PRD, or Party of the Democratic Revolution), which continues to oppose the energy reforms.

The secondary laws establish that compensation must be based upon negotiation between the parties based on market forces. Also, the law gives preference to the need to exploit the hydrocarbon resources over other uses. This is likely to result in local conflicts. Although PEMEX has experience in negotiating with indigenous communities in the tight sands of the Chicontepec region, other private enterprises may be reluctant to assert their legal rights in the face of local protest. PEMEX developed a cadre of experienced social workers to engage with each of the communities throughout Chicontepec. Therefore, it would be advisable to enter into joint ventures with PEMEX for the development of onshore fields where the potential for social conflict with local communities exists.

Going Forward

The next stage is for the Ministry of Energy to reveal the list of offshore and onshore fields that PEMEX wishes to develop itself or in joint ventures. This could be published as early as the week of August 18. The Energy Minister will decide which blocs PEMEX keeps and which blocs must be released; decisions with both technical and political consequences. PEMEX is already in preliminary discussions with potential joint venture partners and the opportunities for joint production, as well as service contracts in the upstream sector, will be plentiful. However, it remains to be seen how the Energy Ministry, together with theCNH manage the numerous bids. The timetable and the auction process have yet to be announced thus adding a layer of uncertainty for any future contracts. The commitment of the Mexican ministries and regulatory bodies to transparency is key; a process required by law but complex in its application. International investors may judge the management of the initial bidding process as indicative of what lies ahead when exploration and production in off shore fields, as well as shale basins become available through asignaciones in the first half of 2015.

Enactment of the energy reforms has two important implications: President Peña Nieto’s determination to balance the interests of potential investors versus the ongoing viability of PEMEX, and the success of the reforms measured by increased production and greater revenues for the government. To accomplish both, the drafters of the legislation have consulted widely to determine the best international practice. The government has publicly announced that it has learned from the experiences of Angola, Brazil, China, Nigeria and others with high petroleum reserves. The new fiscal regime is taken from the experience of other newly industrialized countries. The intent is to avoid mistakes. Reforming the energy sector is the jewel in Peña Nieto’s reform process and it must not be derailed. This is a defining moment for Mexico as it enters the global age of technological advantage and commits to raising the monies from foreign investors to pursue the development of infrastructure, quality education and social progress for its citizens.

Eduardo Campos, Brazilian presidential candidate and former governor of Pernambuco, came to Brookings on September 14, 2007 to participate in the first Brookings event on Brazil in recent memory. Aged 42, Campos had emerged as a leading player in Brazilian national politics and he came to Washington to advocate for the globalization of Brazil’s economy and the importance of science and technology. An economist, former congressman and minister of science and technology under President Luiz Inacio Lula da Silva, Campos was formerly a key ally of future president Dilma Rousseff. In 2011, he was elected president of the Brazilian Socialist Party and led his party as its presidential candidate for the October 2014 elections.

At Brookings, Campos participated in a panel discussion on the global reach of Brazilian policy. Although he spoke no English, his presentation was vigorous and enlightening. He was governor of Pernambuco from 2007 to 2014, a state with significant agricultural potential, including sugar cane for the expanding ethanol industry. He was also steeped in Brazil’s scientific projects which he was eager to advance.

This was the heyday of Brazil’s rise and Campos portrayed it enthusiastically. Petrobras had just made its huge offshore discovery in the Tupi field which held an estimated 8 billion barrels of oil, equivalent to 40 percent of Brazil’s total reserves. Brazil’s GDP was growing at an annual rate of 5.2 percent with record-high investment and the highest investment to GDP ratio in 10 years. Agriculture production grew by more than 9 percent year on year, and real wages had gained thanks to the strength of consumption and the credit sectors. Campos's delivery at Brookings that day reflected all this economic growth and the potential for global reach. He would go on to win a second term as governor with 83 percent of the vote in the 2010 elections.

Lincoln Gordon, a senior fellow and ambassador to Brazil from 1961 to 1966, was present at Brookings. His love for Brazil and all things Brazilian was well known. He is remembered fondly for his several books, including Brazil’s Second Chance: En Route Toward the First World. Both Gordon in his book and Campos in his remarks at Brookings focused on the extraordinary natural resources with which Brazil is endowed and the potential to raise the living standards of all its citizens. Both recognized the influence that Brazil could play beyond its borders on the global stage. Gordon died in December 2009, aged 96 years. Tragically, Governor Campos died at 49 years old, leaving a wife and five children.

All of those who participated with Campos in this Brookings meeting remember his magnetism and determination. We join with the citizens of Pernambuco in mourning his death in a tragic aircraft accident on August 13, 2014.

Authors

Eduardo Campos, Brazilian presidential candidate and former governor of Pernambuco, came to Brookings on September 14, 2007 to participate in the first Brookings event on Brazil in recent memory. Aged 42, Campos had emerged as a leading player in Brazilian national politics and he came to Washington to advocate for the globalization of Brazil’s economy and the importance of science and technology. An economist, former congressman and minister of science and technology under President Luiz Inacio Lula da Silva, Campos was formerly a key ally of future president Dilma Rousseff. In 2011, he was elected president of the Brazilian Socialist Party and led his party as its presidential candidate for the October 2014 elections.

At Brookings, Campos participated in a panel discussion on the global reach of Brazilian policy. Although he spoke no English, his presentation was vigorous and enlightening. He was governor of Pernambuco from 2007 to 2014, a state with significant agricultural potential, including sugar cane for the expanding ethanol industry. He was also steeped in Brazil’s scientific projects which he was eager to advance.

This was the heyday of Brazil’s rise and Campos portrayed it enthusiastically. Petrobras had just made its huge offshore discovery in the Tupi field which held an estimated 8 billion barrels of oil, equivalent to 40 percent of Brazil’s total reserves. Brazil’s GDP was growing at an annual rate of 5.2 percent with record-high investment and the highest investment to GDP ratio in 10 years. Agriculture production grew by more than 9 percent year on year, and real wages had gained thanks to the strength of consumption and the credit sectors. Campos's delivery at Brookings that day reflected all this economic growth and the potential for global reach. He would go on to win a second term as governor with 83 percent of the vote in the 2010 elections.

Lincoln Gordon, a senior fellow and ambassador to Brazil from 1961 to 1966, was present at Brookings. His love for Brazil and all things Brazilian was well known. He is remembered fondly for his several books, including Brazil’s Second Chance: En Route Toward the First World. Both Gordon in his book and Campos in his remarks at Brookings focused on the extraordinary natural resources with which Brazil is endowed and the potential to raise the living standards of all its citizens. Both recognized the influence that Brazil could play beyond its borders on the global stage. Gordon died in December 2009, aged 96 years. Tragically, Governor Campos died at 49 years old, leaving a wife and five children.

All of those who participated with Campos in this Brookings meeting remember his magnetism and determination. We join with the citizens of Pernambuco in mourning his death in a tragic aircraft accident on August 13, 2014.

Authors

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http://www.brookings.edu/blogs/up-front/posts/2014/07/02-unaccompanied-children-central-america-negroponte?rssid=negroponted{EAD7935D-2CDD-4713-9F5C-825661A6BE2F}http://webfeeds.brookings.edu/~/68000729/0/brookingsrss/experts/negroponted~The-Surge-in-Unaccompanied-Children-from-Central-America-A-Humanitarian-Crisis-at-Our-BorderThe Surge in Unaccompanied Children from Central America: A Humanitarian Crisis at Our Border

The fate of 47 thousand children, most of them from Central America and the prospect of 43 thousand more children crossing the Texan border illegally by the end of 2014 poses a serious challenge to the laws of the United States and our humanitarian values. How should we treat these children? Should they be united with parents and family members living in the US or deported for entering the U.S. without sufficient reasons to justify asylum?

Three quarters of recently arrived and unaccompanied children originate from the three northern Central American states: Honduras, El Salvador and Guatemala. The phenomenon of children seeking to join their parents in the United States is not new. The difference lies in the number of children making their way from Central America to cross the Rio Grande Valley into South Texas. According to the Border Patrol, apprehension of unaccompanied children increased from 16,067 in FY 2011 to 24,481 in FY 2012 and 38,833 in FY 2013. During the first eight months of FY 2014, 47,017 children were apprehended, most of them from Honduras. If this flow continues at the current rate, the Border Patrol anticipates that 90,000 unaccompanied children could be apprehended by the end of the fiscal year (FY) on September 30. The journey is fraught with the danger of depending on human traffickers.

Children originating from a non-contiguous country are subject to distinct legal procedures from those originating in Mexico or Canada. The former are transferred from the Border Patrol to the Office of Refugee Resettlement (ORR), an agency of the Department of Health and Human Services (HHS) that is responsible for processing and sheltering unaccompanied minors. Under the Trafficking Victims Protection Reauthorization Act (PDF) (TVPRA) children from non-contiguous states must be transferred to ORR within 72 hours and simultaneously placed in removal proceedings with the Executive Office for Immigration Review (EOIR), within the Department of Justice.

The reality is that insufficient space exists to house the large number of apprehended children and the Immigration Courts are seriously overwhelmed by the number of removal proceedings. Consequently children wait on average 578 days before a Hearing. During that time, the child is placed with a parent or family member who must vouch that the child will appear in Court. The Migration Policy Institute anticipates that approximately 85-90 percent of children are placed with a parent or close relative. Thus, the current procedures provide the incentive for parents to be reunited with their children while awaiting their Hearing date. Emotional bonds are reestablished, schools attended, vaccines given and hope raised that the child can remain in the United States.

Before joining their families, ORR is responsible for lodging and feeding the child for up to 45 days. But current HHS centers are already filled in Texas, California and Oklahoma. To meet this need, the administration in early June requested $1.57 billion in emergency funding to house, feed, process and transport these children before they can be released to join relatives, or be placed in foster care.

The principal grounds for remaining in the United States are refugeeasylum – fear of persecution for reasons of race, religion, nationality and membership in a particular social group or political opinion – and Special Immigrant Juvenile Status, granted to children who can establish that they were abused, neglected or abandoned by one or both parents. The Vera Institute estimates that 40 percent of unaccompanied children have humanitarian claims recognized in U.S. and international courts. However, the principal causes that send children to the United States are family reunification, poverty and fear of violence from local criminal organizations. Unless they were abused by traffickers on their journey to the U.S. border, it is hard for defense attorneys to prove the legal grounds required for refugee status. Consequently, half the children may eventually be sent home. In the meantime while they await their Court Hearing, they have a right to attend school and access health care, posing costs upon State and District budgets. To date in FY 2014, 3,300 children have been discharged to relatives or foster care in New York State, alone.

Two push factors and two pull factors explain the recent surge in unaccompanied children migrants.

Push Factors:

Economic conditions with endemic poverty, high youth unemployment and a close correlation between poor geographic areas and outflows of child migrants.

Violence in the region. Organized criminal violence plagues the three Central American countries with homicide rates among the highest in the hemisphere. Recruitment into maras, or other local gangs is pervasive and grandparents seek to protect their grandchildren by sending them to join a parent al norte.

Pull Factors:

It is estimated that 2.5 million Central Americans live in the United States, 60 percent of which are either undocumented or live with Temporary Protective Status (TPS) which denies them the right to petition for family reunification. Hope for reunification with children and better living standards enable family members in the United States to pay the $6-7,000 to traffickers who bring the child from his home in Central America to the U.S. side of the border. When Congress created TPS in 1990 and extended it to 220,000 Salvadorans in 2001, we failed to anticipate that they would seek to unite with their children.

Criminal social networks, operating throughout the Americas have created human trafficking rings that offer door to door service. The Mexican government’s combat against these criminal organizations has pushed them into alternative profitable ventures, including the smuggling of Central American children. We should expect that as U.S. policy changes so too will the behavior of these organizations. They will react smartly to evolving U.S. policies.

What are the appropriate U.S. policy responses?

There is no easy solution to this complex problem which has existed for over a decade, but whose surge in numbers presents a challenge to U.S. policy makers and resources. Solutions require immediate action from law enforcement and HHS as well as engagement on longer term solutions by the State Department in support of the Central American sending nations.

Federal law enforcement authorities must confront and prosecute these criminal organizations which profit off unaccompanied children, as well as other undocumented migrants. Transnational efforts are needed to identify them and their work in the sending countries, as well as to disrupt their money laundering practices.

Apprehended children need to be screened by ORR as swiftly as possible to determine the validity of their claims. The White House's anticipated request for congressional action on a supplemental appropriation of an additional $2 million for immigration courts, among other issues, will not prove sufficient to legally process newcomers as well as hear the backlog of cases. Therefore, greater attention should be given to hearings for children arriving after July 2014 with the intent of sending a strong message to the sending country that their unaccompanied children will not be able to join their parent or family member while they wait 18 months or more for a court appearance.

Swift resolution of refugee asylum and Special Immigration Status cases will require a significant budget to increase the number of asylum officers, immigration judges and to train both prosecution and defense attorneys. This may come from civil society, but national support for training in the law could help to ensure that young defendants have a guide through the mysterious world of immigration law.

The backlog of ORR cases will take time to work through and should be accomplished, but the immediate task is to send a strong disincentive message to the adults who both send and receive these children.

Distinctive treatment between those arriving from Mexico and Canada and those arriving from non-contiguous states may have to end. Nearly all Mexican unaccompanied children are quickly returned to Mexico. With the assistance of Consuls from the countries of origin, a decision to deny asylum and Special Immigration Status requires governmental assistance in the repatriation and reintegration of the child back home. Civil society should monitor the returning children to ensure that they are not abused.

Over the longer term, the perennial concern for economic development and education in the sending nations of Central America endures. Levels of poverty have not decreased enough to ensure job creation and quality education. Standards of living must increase in order to persuade those who care for the children that the risks of the journey are not worth the gains in the United States.

Together, these policy recommendations seek to balance our respect for immigration laws and due process with humanitarian values which ensure that the child will be cared for both in the United States and, when appropriate, upon return to the sending country.

Authors

The fate of 47 thousand children, most of them from Central America and the prospect of 43 thousand more children crossing the Texan border illegally by the end of 2014 poses a serious challenge to the laws of the United States and our humanitarian values. How should we treat these children? Should they be united with parents and family members living in the US or deported for entering the U.S. without sufficient reasons to justify asylum?

Three quarters of recently arrived and unaccompanied children originate from the three northern Central American states: Honduras, El Salvador and Guatemala. The phenomenon of children seeking to join their parents in the United States is not new. The difference lies in the number of children making their way from Central America to cross the Rio Grande Valley into South Texas. According to the Border Patrol, apprehension of unaccompanied children increased from 16,067 in FY 2011 to 24,481 in FY 2012 and 38,833 in FY 2013. During the first eight months of FY 2014, 47,017 children were apprehended, most of them from Honduras. If this flow continues at the current rate, the Border Patrol anticipates that 90,000 unaccompanied children could be apprehended by the end of the fiscal year (FY) on September 30. The journey is fraught with the danger of depending on human traffickers.

Children originating from a non-contiguous country are subject to distinct legal procedures from those originating in Mexico or Canada. The former are transferred from the Border Patrol to the Office of Refugee Resettlement (ORR), an agency of the Department of Health and Human Services (HHS) that is responsible for processing and sheltering unaccompanied minors. Under the Trafficking Victims Protection Reauthorization Act (PDF) (TVPRA) children from non-contiguous states must be transferred to ORR within 72 hours and simultaneously placed in removal proceedings with the Executive Office for Immigration Review (EOIR), within the Department of Justice.

The reality is that insufficient space exists to house the large number of apprehended children and the Immigration Courts are seriously overwhelmed by the number of removal proceedings. Consequently children wait on average 578 days before a Hearing. During that time, the child is placed with a parent or family member who must vouch that the child will appear in Court. The Migration Policy Institute anticipates that approximately 85-90 percent of children are placed with a parent or close relative. Thus, the current procedures provide the incentive for parents to be reunited with their children while awaiting their Hearing date. Emotional bonds are reestablished, schools attended, vaccines given and hope raised that the child can remain in the United States.

Before joining their families, ORR is responsible for lodging and feeding the child for up to 45 days. But current HHS centers are already filled in Texas, California and Oklahoma. To meet this need, the administration in early June requested $1.57 billion in emergency funding to house, feed, process and transport these children before they can be released to join relatives, or be placed in foster care.

The principal grounds for remaining in the United States are refugeeasylum – fear of persecution for reasons of race, religion, nationality and membership in a particular social group or political opinion – and Special Immigrant Juvenile Status, granted to children who can establish that they were abused, neglected or abandoned by one or both parents. The Vera Institute estimates that 40 percent of unaccompanied children have humanitarian claims recognized in U.S. and international courts. However, the principal causes that send children to the United States are family reunification, poverty and fear of violence from local criminal organizations. Unless they were abused by traffickers on their journey to the U.S. border, it is hard for defense attorneys to prove the legal grounds required for refugee status. Consequently, half the children may eventually be sent home. In the meantime while they await their Court Hearing, they have a right to attend school and access health care, posing costs upon State and District budgets. To date in FY 2014, 3,300 children have been discharged to relatives or foster care in New York State, alone.

Two push factors and two pull factors explain the recent surge in unaccompanied children migrants.

Push Factors:

Economic conditions with endemic poverty, high youth unemployment and a close correlation between poor geographic areas and outflows of child migrants.

Violence in the region. Organized criminal violence plagues the three Central American countries with homicide rates among the highest in the hemisphere. Recruitment into maras, or other local gangs is pervasive and grandparents seek to protect their grandchildren by sending them to join a parent al norte.

Pull Factors:

It is estimated that 2.5 million Central Americans live in the United States, 60 percent of which are either undocumented or live with Temporary Protective Status (TPS) which denies them the right to petition for family reunification. Hope for reunification with children and better living standards enable family members in the United States to pay the $6-7,000 to traffickers who bring the child from his home in Central America to the U.S. side of the border. When Congress created TPS in 1990 and extended it to 220,000 Salvadorans in 2001, we failed to anticipate that they would seek to unite with their children.

Criminal social networks, operating throughout the Americas have created human trafficking rings that offer door to door service. The Mexican government’s combat against these criminal organizations has pushed them into alternative profitable ventures, including the smuggling of Central American children. We should expect that as U.S. policy changes so too will the behavior of these organizations. They will react smartly to evolving U.S. policies.

What are the appropriate U.S. policy responses?

There is no easy solution to this complex problem which has existed for over a decade, but whose surge in numbers presents a challenge to U.S. policy makers and resources. Solutions require immediate action from law enforcement and HHS as well as engagement on longer term solutions by the State Department in support of the Central American sending nations.

Federal law enforcement authorities must confront and prosecute these criminal organizations which profit off unaccompanied children, as well as other undocumented migrants. Transnational efforts are needed to identify them and their work in the sending countries, as well as to disrupt their money laundering practices.

Apprehended children need to be screened by ORR as swiftly as possible to determine the validity of their claims. The White House's anticipated request for congressional action on a supplemental appropriation of an additional $2 million for immigration courts, among other issues, will not prove sufficient to legally process newcomers as well as hear the backlog of cases. Therefore, greater attention should be given to hearings for children arriving after July 2014 with the intent of sending a strong message to the sending country that their unaccompanied children will not be able to join their parent or family member while they wait 18 months or more for a court appearance.

Swift resolution of refugee asylum and Special Immigration Status cases will require a significant budget to increase the number of asylum officers, immigration judges and to train both prosecution and defense attorneys. This may come from civil society, but national support for training in the law could help to ensure that young defendants have a guide through the mysterious world of immigration law.

The backlog of ORR cases will take time to work through and should be accomplished, but the immediate task is to send a strong disincentive message to the adults who both send and receive these children.

Distinctive treatment between those arriving from Mexico and Canada and those arriving from non-contiguous states may have to end. Nearly all Mexican unaccompanied children are quickly returned to Mexico. With the assistance of Consuls from the countries of origin, a decision to deny asylum and Special Immigration Status requires governmental assistance in the repatriation and reintegration of the child back home. Civil society should monitor the returning children to ensure that they are not abused.

Over the longer term, the perennial concern for economic development and education in the sending nations of Central America endures. Levels of poverty have not decreased enough to ensure job creation and quality education. Standards of living must increase in order to persuade those who care for the children that the risks of the journey are not worth the gains in the United States.

Together, these policy recommendations seek to balance our respect for immigration laws and due process with humanitarian values which ensure that the child will be cared for both in the United States and, when appropriate, upon return to the sending country.

The Mexican Congress has just opened an Extraordinary Session to discuss the energy reform and its secondary, or implementing legislation. One political and four technical issues need to be addressed: the capacity of new regulatory agencies to act independently and competently in the new energy sphere; the lack of predictable tax rates for exploration and production; the exposure to liability for accidents in the deep waters of the Gulf of Mexico; and the rights of landowners to the surface property, beneath which abundant shale gas exists. Overhanging the debate is the opposition’s call for a consulta popular, or referendum, on the energy reform itself. The opposition parties claim that energy reform is precisely the type of national debate that should be submitted to a national referendum. The government insists that this reform is a constitutional issue which is explicitly excluded from referenda. The Supreme Court must decide. In this Extraordinary Session of the Mexican Congress, observers seek to understand the major issues and their challenges.

The publication of 21 laws that, if passed, will implement both the hydrocarbons and electrical energy sectors is under close scrutiny by Mexican legislators, as well as petroleum experts in the U.S. Five issues dominate the debate: the capacity of new regulatory agencies to act independently and competently in the new energy sphere; the lack of predictable tax rates for exploration and production; the exposure to liability for accidents in the deep waters of the Gulf of Mexico; and the rights of landowners to the surface property, beneath which abundant shale gas exists. Finally, overhanging the debate over the secondary laws is the political issue of whether the opposition, Partido Revolucionario Democratico’s (PRD) demand for a ‘consulta popular’ (referendum) on the acceptance or rejection of the energy reform is constitutionally permissible. In Washington, as well as in Houston and Mexico City, discussions are heated on these issues ahead of an Extraordinary Session of the Mexican Senate and Chamber of Deputies in the second half of June. It is expected that the draft secondary legislation will be amended to take into account the most critical issues, including those that influence private investors seeking to contract with PEMEX and with the Mexican government.

Three essential purposes drive this reform: attract private investment and stimulate growth; convert Petroleos Mexicanos (PEMEX) and the Comisión Federal de Electricidad (CFE) into efficient, productive and competitive enterprises; and transit from a fiscal regime that was dependent upon PEMEX for approximately 40 percent of government revenues to alternative sources of revenue to support desired improvements in health, education and infrastructure. It is not coincidental that the energy legislation was published two days after the National Infrastructure Program for 2014 – 2018. This Program outlines ambitious developments of broadband, roads, ports and a bullet train totaling $590 billion. A proportion of these funds will have to come from royalties and taxes paid by private investors in the reformed energy sector, as well as private/public/ partnerships in the infrastructure projects themselves.[1]

The legislation on hydrocarbons lays out two principal forms of contracts:

“Entitlement” contracts: These are onshore or low risk contracts which PEMEX has identified as fields that it wishes to exploit in joint ventures with a selected, or number of selected companies. To accomplish this, PEMEX must have both the technical feasibility to exploit with a private partner and the capacity to determine the kind of contract it wishes to offer: a contract called “entitlement.” Within “entitlement” acreage, PEMEX may be the operator, or a private operator may work for PEMEX. These contracts will be paid for either in cash, or in the form of shared production.

“Assigned” contracts: Here, PEMEX holds no “entitlement.” Instead, the Comisión Nacional de Hidrocarburos (CNH) identifies extraction & production contracts in which private parties may invest because PEMEX lacks technical capacity. Then CNH, together with the Secretaría de Energía (SENER) and the Secretaría de Hacienda y Crédito Público (Hacienda) will establish terms for attracting new investment. The royalty and tax regime, as well as the award or denial of “ring fencing” still has to be determined, preferably before the bidding process begins.[2] International oil companies (IOCs) follow these issues with microscopic attention. In these “assigned” contracts, issued under license, PEMEX will determine the parameters of the “assigned” contracts, but CNH will issue bid proposals and manage the auction. Thereafter, PEMEX can express an opinion, which maybe negative, but its role is significantly reduced from the monopoly position it held historically. The only assurance given in the law to PEMEX is that it shall hold a minimum of 20 percent of the joint venture assets in every “assigned” contract.

Under both regimes, the role of CNH is critical. It is responsible for managing the bidding process, awarding the contracts and supervising the implementation. CNH was founded at the time of President Calderon’s reform of the energy sector in 2008 to support SENER in the definition and implementation of those reforms. On paper, CNH holds autonomy in technical matters as well as the drafting of regulations, supervision and evaluation of energy related activities. However, its current staffing of approximately 80 persons is clearly insufficient to undertake all the tasks assigned to the regulatory agency under the energy reforms. Furthermore, Mexico lacks a culture of independent regulatory agencies and is expected in the future to rely on the political direction of SENER and Hacienda.

Under the proposed reform, SENER will provide the technical guidelines on all contracts. Given the responsibilities of CNH and SENER, a large pool of petroleum and civil engineers, as well as geologists is needed to staff both CNH and SENER.[3] In Mexico, they are to be found within PEMEX, but the transfer from a national oil company to a state-owned, productive company may not be sufficiently attractive to siphon off quality engineers. PEMEX will start to offer competitive salaries to keep the best engineers. However, SENER and the regulatory commissions will be constrained by government pay scales. Observers will therefore watch closely CNH’s capacity to manage auctions and supervise contracts.

The responsibility for collecting taxes and royalties lies with Hacienda. Under the new laws, it will establish the “adjustment mechanism” (tax) with CNH. At present, the secondary legislation fails to provide long term predictable guidelines on the fiscal regime and the contract terms, but we may assume that these are being discussed in the Senate Committee, charged with developing the fiscal regime for the benefit of the state. Given the present reliance upon PEMEX for a significant chunk of government revenue – over 71 percent of PEMEX income is transferred to Hacienda to meet day to day expenses – Hacienda’s minister is expected to play a dominant role in the drafting of contracts and the establishment of royalty and tax regimes.

This raises the important issue of seismic data that should become available to private investors in the short term. PEMEX has entered into a multi-year service contract with GX Technology, a subsidiary of ION Geophysical. Using the parent company’s high performance computing center in Houston, GXT’s office in Villahermosa will provide a broad range of seismic data processing through advanced imaging techniques for multiple offshore and onshore surveys. The advantage of this independent data provider is that the seismic imaging collected by PEMEX over several years will be available to private companies through purchase contracts with GXT, a well-established and highly reputed company. This avoids the accusation that PEMEX favors certain investors over others.

Uncertainty exists on the liability for both exploration/production and service companies in the deep waters of the Gulf of Mexico. Will there be unlimited liability for gross negligence, i.e. BP for Macondo, or should a cap exist? There is also the question of who has the right to sue? These issues are expected to be clarified in amendments to the Secondary legislation which is expected to establish a liability system comparable to that in the USA.

Fourth, the issue of land ownership and surface rights could become troublesome if CNH sought to auction off exploration and production rights in the Burgos shale gas field, adjacent to the Texan Eagle Ford. While ownership of the subsoil remains the property of the Mexican people, no clear guidance exists as to ownership of the surface property. Could the Mexican government impose “temporary eminent domain” so as to permit extraction of gas through fracking? Private owners of otherwise barren lands will appear rapidly to contest this taking. Many of the owners of these barren lands are indigenous communities who are expected to resist transfer of their ancestral lands.

It is anticipated that these dry scrub lands will be bought and sold rapidly, including purchase by surrogates of drug cartels, to benefit from the anticipated boom. PEMEX chief, Emilio Lozoya has announced that Mexico has 460 trillion cubic feet of unexploited shale gas with an estimated worth of $2.2 trillion.[4] But raising expectations of a shale boom must take into account the complexity of surface rights. Furthermore, given the low cost of US shale gas and the high costs and complexity of obtaining surface rights and financing, Mexico might chose to delay its development of the Burgos, Sabinas and Tampico gas fields and concentrate instead on deep water prospects.

Considerable experience exists among the majors in the extraction of oil and gas from deep water and below salt. PEMEX anticipates oil reserves of 26.6 billion barrels in the Gulf of Mexico. At current prices, these reserves are worth $11 trillion.[5] Overtime, this offshore area of exploitation would provide the revenues needed to meet the national infrastructure plans, but time is needed and we may not see strong revenue flows until 2019, the year after President Peña Nieto steps aside for the next Mexican leader.

Overhanging the debate on the five critical issues is the uncertainty over the consulta popular. The PRD firmly opposes the energy reform and claims to have collected close to 4 million signatures – in excess of the 1.6 million registered voters required by the recently approved law controlling Mexico’s consulta popular.[6] Sufficient support clearly exists among registered voters to petition for a referendum on an issue of transcendental national importance. However, that same law states that constitutional issues are excluded from a national referendum. It is therefore up to the Mexican Supreme Court to determine whether the energy reform is predominantly a constitutional issue which would deny the right to hold a referendum, or substantively an energy and economic reform which might be considered a legitimate subject for the consulta popular.

Several procedural steps must still be taken before this question is posed before the Mexican Supreme Court. Meantime, senior Mexican government officials are spreading the word that this reform is a constitutional issue, which required amendment to the Mexican constitution by two-thirds approval of the legislature, as well as the Mexican states. Suggestions that an independent Supreme Court might interpret the energy reform as anything other than a constitutional issue are dismissed. Based on these political assurances, rather than the decision of the Court, numerous interested parties have approached PEMEX quietly with a view to preparing “entitlement” contracts. Nevertheless, before approval of the secondary legislation it is premature to determine how the prospect of a consulta popular might affect the more financially burdensome, but lucrative “assigned” contracts.

The Extraordinary Session of the Mexican Congress this June will raise many of the issues discussed above. Foreign observers should expect the secondary legislation to become law in July. This opens the way for purchase of geological data, the publication of PEMEX fields and the start of bidding for joint venture partners. Soon thereafter, we expect the contracts for exploration and production in the deep waters of the Gulf of Mexico to be announced.

PRD leader, Jesus Zambrano Grijalva recently stated that his party will respect contracts entered into between PEMEX and private parties.[7] Given, that the PRD is also determined to win the next presidential election, it may not wish to provoke moderate voters by reneging on private contracts and license agreements. Nevertheless, the PRD has promised its political base that it will seek a consulta popular which will ask voters to accept or reject the energy reform. Until the Mexican Supreme Court renders its decision on the admissibility, or not, of this referendum, major investors may seek to wait and see. Meantime, the Mexican government demonstrates a determination to move ahead with the energy reforms, all the while knowing that a decade or more is needed to fulfill citizens’ expectations of lower prices for energy and increased revenues to pay for the National Infrastructure Program.

[1] The reform of CFE is addressed in the secondary legislation, but this article will focus on hydrocarbons. Further articles will address the electrical industry and options available for private investment in the transmission and distribution to residential and industrial complexes. At present the reform of hydrocarbons is politically more heated, but we should expect electrical reform to become equally sensitive as investors look to the pricing mechanism and citizens wait for the promised reduction in electricity bills.

[2] Ring fencing determines the level at which each fiscal or administrative component of a contract is to be calculated and administered. Ring fencing allows the costs and production to be pooled along with certain exploration expenses. This removes some of the risk for contractors and encourages them to make additional expenditures. However, some governments are reluctant to allow such ring fencing because it may significantly reduce their revenue in the short term. The level of “ring fencing” is therefore important to major investors.

Authors

The Mexican Congress has just opened an Extraordinary Session to discuss the energy reform and its secondary, or implementing legislation. One political and four technical issues need to be addressed: the capacity of new regulatory agencies to act independently and competently in the new energy sphere; the lack of predictable tax rates for exploration and production; the exposure to liability for accidents in the deep waters of the Gulf of Mexico; and the rights of landowners to the surface property, beneath which abundant shale gas exists. Overhanging the debate is the opposition’s call for a consulta popular, or referendum, on the energy reform itself. The opposition parties claim that energy reform is precisely the type of national debate that should be submitted to a national referendum. The government insists that this reform is a constitutional issue which is explicitly excluded from referenda. The Supreme Court must decide. In this Extraordinary Session of the Mexican Congress, observers seek to understand the major issues and their challenges.

The publication of 21 laws that, if passed, will implement both the hydrocarbons and electrical energy sectors is under close scrutiny by Mexican legislators, as well as petroleum experts in the U.S. Five issues dominate the debate: the capacity of new regulatory agencies to act independently and competently in the new energy sphere; the lack of predictable tax rates for exploration and production; the exposure to liability for accidents in the deep waters of the Gulf of Mexico; and the rights of landowners to the surface property, beneath which abundant shale gas exists. Finally, overhanging the debate over the secondary laws is the political issue of whether the opposition, Partido Revolucionario Democratico’s (PRD) demand for a ‘consulta popular’ (referendum) on the acceptance or rejection of the energy reform is constitutionally permissible. In Washington, as well as in Houston and Mexico City, discussions are heated on these issues ahead of an Extraordinary Session of the Mexican Senate and Chamber of Deputies in the second half of June. It is expected that the draft secondary legislation will be amended to take into account the most critical issues, including those that influence private investors seeking to contract with PEMEX and with the Mexican government.

Three essential purposes drive this reform: attract private investment and stimulate growth; convert Petroleos Mexicanos (PEMEX) and the Comisión Federal de Electricidad (CFE) into efficient, productive and competitive enterprises; and transit from a fiscal regime that was dependent upon PEMEX for approximately 40 percent of government revenues to alternative sources of revenue to support desired improvements in health, education and infrastructure. It is not coincidental that the energy legislation was published two days after the National Infrastructure Program for 2014 – 2018. This Program outlines ambitious developments of broadband, roads, ports and a bullet train totaling $590 billion. A proportion of these funds will have to come from royalties and taxes paid by private investors in the reformed energy sector, as well as private/public/ partnerships in the infrastructure projects themselves.[1]

The legislation on hydrocarbons lays out two principal forms of contracts:

“Entitlement” contracts: These are onshore or low risk contracts which PEMEX has identified as fields that it wishes to exploit in joint ventures with a selected, or number of selected companies. To accomplish this, PEMEX must have both the technical feasibility to exploit with a private partner and the capacity to determine the kind of contract it wishes to offer: a contract called “entitlement.” Within “entitlement” acreage, PEMEX may be the operator, or a private operator may work for PEMEX. These contracts will be paid for either in cash, or in the form of shared production.

“Assigned” contracts: Here, PEMEX holds no “entitlement.” Instead, the Comisión Nacional de Hidrocarburos (CNH) identifies extraction & production contracts in which private parties may invest because PEMEX lacks technical capacity. Then CNH, together with the Secretaría de Energía (SENER) and the Secretaría de Hacienda y Crédito Público (Hacienda) will establish terms for attracting new investment. The royalty and tax regime, as well as the award or denial of “ring fencing” still has to be determined, preferably before the bidding process begins.[2] International oil companies (IOCs) follow these issues with microscopic attention. In these “assigned” contracts, issued under license, PEMEX will determine the parameters of the “assigned” contracts, but CNH will issue bid proposals and manage the auction. Thereafter, PEMEX can express an opinion, which maybe negative, but its role is significantly reduced from the monopoly position it held historically. The only assurance given in the law to PEMEX is that it shall hold a minimum of 20 percent of the joint venture assets in every “assigned” contract.

Under both regimes, the role of CNH is critical. It is responsible for managing the bidding process, awarding the contracts and supervising the implementation. CNH was founded at the time of President Calderon’s reform of the energy sector in 2008 to support SENER in the definition and implementation of those reforms. On paper, CNH holds autonomy in technical matters as well as the drafting of regulations, supervision and evaluation of energy related activities. However, its current staffing of approximately 80 persons is clearly insufficient to undertake all the tasks assigned to the regulatory agency under the energy reforms. Furthermore, Mexico lacks a culture of independent regulatory agencies and is expected in the future to rely on the political direction of SENER and Hacienda.

Under the proposed reform, SENER will provide the technical guidelines on all contracts. Given the responsibilities of CNH and SENER, a large pool of petroleum and civil engineers, as well as geologists is needed to staff both CNH and SENER.[3] In Mexico, they are to be found within PEMEX, but the transfer from a national oil company to a state-owned, productive company may not be sufficiently attractive to siphon off quality engineers. PEMEX will start to offer competitive salaries to keep the best engineers. However, SENER and the regulatory commissions will be constrained by government pay scales. Observers will therefore watch closely CNH’s capacity to manage auctions and supervise contracts.

The responsibility for collecting taxes and royalties lies with Hacienda. Under the new laws, it will establish the “adjustment mechanism” (tax) with CNH. At present, the secondary legislation fails to provide long term predictable guidelines on the fiscal regime and the contract terms, but we may assume that these are being discussed in the Senate Committee, charged with developing the fiscal regime for the benefit of the state. Given the present reliance upon PEMEX for a significant chunk of government revenue – over 71 percent of PEMEX income is transferred to Hacienda to meet day to day expenses – Hacienda’s minister is expected to play a dominant role in the drafting of contracts and the establishment of royalty and tax regimes.

This raises the important issue of seismic data that should become available to private investors in the short term. PEMEX has entered into a multi-year service contract with GX Technology, a subsidiary of ION Geophysical. Using the parent company’s high performance computing center in Houston, GXT’s office in Villahermosa will provide a broad range of seismic data processing through advanced imaging techniques for multiple offshore and onshore surveys. The advantage of this independent data provider is that the seismic imaging collected by PEMEX over several years will be available to private companies through purchase contracts with GXT, a well-established and highly reputed company. This avoids the accusation that PEMEX favors certain investors over others.

Uncertainty exists on the liability for both exploration/production and service companies in the deep waters of the Gulf of Mexico. Will there be unlimited liability for gross negligence, i.e. BP for Macondo, or should a cap exist? There is also the question of who has the right to sue? These issues are expected to be clarified in amendments to the Secondary legislation which is expected to establish a liability system comparable to that in the USA.

Fourth, the issue of land ownership and surface rights could become troublesome if CNH sought to auction off exploration and production rights in the Burgos shale gas field, adjacent to the Texan Eagle Ford. While ownership of the subsoil remains the property of the Mexican people, no clear guidance exists as to ownership of the surface property. Could the Mexican government impose “temporary eminent domain” so as to permit extraction of gas through fracking? Private owners of otherwise barren lands will appear rapidly to contest this taking. Many of the owners of these barren lands are indigenous communities who are expected to resist transfer of their ancestral lands.

It is anticipated that these dry scrub lands will be bought and sold rapidly, including purchase by surrogates of drug cartels, to benefit from the anticipated boom. PEMEX chief, Emilio Lozoya has announced that Mexico has 460 trillion cubic feet of unexploited shale gas with an estimated worth of $2.2 trillion.[4] But raising expectations of a shale boom must take into account the complexity of surface rights. Furthermore, given the low cost of US shale gas and the high costs and complexity of obtaining surface rights and financing, Mexico might chose to delay its development of the Burgos, Sabinas and Tampico gas fields and concentrate instead on deep water prospects.

Considerable experience exists among the majors in the extraction of oil and gas from deep water and below salt. PEMEX anticipates oil reserves of 26.6 billion barrels in the Gulf of Mexico. At current prices, these reserves are worth $11 trillion.[5] Overtime, this offshore area of exploitation would provide the revenues needed to meet the national infrastructure plans, but time is needed and we may not see strong revenue flows until 2019, the year after President Peña Nieto steps aside for the next Mexican leader.

Overhanging the debate on the five critical issues is the uncertainty over the consulta popular. The PRD firmly opposes the energy reform and claims to have collected close to 4 million signatures – in excess of the 1.6 million registered voters required by the recently approved law controlling Mexico’s consulta popular.[6] Sufficient support clearly exists among registered voters to petition for a referendum on an issue of transcendental national importance. However, that same law states that constitutional issues are excluded from a national referendum. It is therefore up to the Mexican Supreme Court to determine whether the energy reform is predominantly a constitutional issue which would deny the right to hold a referendum, or substantively an energy and economic reform which might be considered a legitimate subject for the consulta popular.

Several procedural steps must still be taken before this question is posed before the Mexican Supreme Court. Meantime, senior Mexican government officials are spreading the word that this reform is a constitutional issue, which required amendment to the Mexican constitution by two-thirds approval of the legislature, as well as the Mexican states. Suggestions that an independent Supreme Court might interpret the energy reform as anything other than a constitutional issue are dismissed. Based on these political assurances, rather than the decision of the Court, numerous interested parties have approached PEMEX quietly with a view to preparing “entitlement” contracts. Nevertheless, before approval of the secondary legislation it is premature to determine how the prospect of a consulta popular might affect the more financially burdensome, but lucrative “assigned” contracts.

The Extraordinary Session of the Mexican Congress this June will raise many of the issues discussed above. Foreign observers should expect the secondary legislation to become law in July. This opens the way for purchase of geological data, the publication of PEMEX fields and the start of bidding for joint venture partners. Soon thereafter, we expect the contracts for exploration and production in the deep waters of the Gulf of Mexico to be announced.

PRD leader, Jesus Zambrano Grijalva recently stated that his party will respect contracts entered into between PEMEX and private parties.[7] Given, that the PRD is also determined to win the next presidential election, it may not wish to provoke moderate voters by reneging on private contracts and license agreements. Nevertheless, the PRD has promised its political base that it will seek a consulta popular which will ask voters to accept or reject the energy reform. Until the Mexican Supreme Court renders its decision on the admissibility, or not, of this referendum, major investors may seek to wait and see. Meantime, the Mexican government demonstrates a determination to move ahead with the energy reforms, all the while knowing that a decade or more is needed to fulfill citizens’ expectations of lower prices for energy and increased revenues to pay for the National Infrastructure Program.

[1] The reform of CFE is addressed in the secondary legislation, but this article will focus on hydrocarbons. Further articles will address the electrical industry and options available for private investment in the transmission and distribution to residential and industrial complexes. At present the reform of hydrocarbons is politically more heated, but we should expect electrical reform to become equally sensitive as investors look to the pricing mechanism and citizens wait for the promised reduction in electricity bills.

[2] Ring fencing determines the level at which each fiscal or administrative component of a contract is to be calculated and administered. Ring fencing allows the costs and production to be pooled along with certain exploration expenses. This removes some of the risk for contractors and encourages them to make additional expenditures. However, some governments are reluctant to allow such ring fencing because it may significantly reduce their revenue in the short term. The level of “ring fencing” is therefore important to major investors.

The process of removing legislative immunity from prosecution for National Assembly member María Corina Machado, the 46-year-old leader of the more activist wing of Venezuela’s opposition, began on March 18. In an emergency session, her fellow legislators voted to remove her immunity and charged her with treason. Two days later she was on a plane to Washington to raise the alarm at the Organization of American States (OAS). Venezuela has become an authoritarian state with political repression, jailing and torture of opponents, reminiscent of the hemisphere’s “Dirty Wars” of the 1980s.

Machado’s colleague, Leopoldo López surrendered to the authorities on February 18 after leading a demonstration that called for the release of students and the respect for democracy. He is held in a military prison charged with incitement to violence, arson and damage to property; the first charge could result in a 10-year sentence. Students are arrested, beaten, raped and released to deter others. Nevertheless, students continue to demonstrate against the government of Nicolás Maduro. Doctors, housewives and union members have joined them. On March 22, hundreds gathered in towns all over Venezuela to protest the arrests of two mayors, one accused of not removing the opposition barricades with sufficient speed. Enzo Scarano could face 10 months in jail. Others demand the end of repression, scarcity of basic foods, over 50 percent inflation and violence by the National Guard and regime henchmen, the paramilitary colectivos. To date, the protests have resulted in 31 deaths, including National Guard members.

With strident political polarization throughout Venezuela’s towns, private production stalling to leave only one to two months inventory supplies and the economy deteriorating fast, the question arises as to who and how the spiraling violence can stop. President Maduro expresses the need for dialogue and has met with the leading producers and manufacturers in Venezuela. However, two weeks later he threatened and charged political opponents, most recently the mayors of San Cristobal and San Diego. In this climate, the opposition is wary of entering into dialogue and has raised their conditions for talks. These now include the removal of Cuban officers from the Venezuelan military. Consequently, prospects for dialogue between the government and political oppositions are dim.

Within Venezuela, people have suggested that the Catholic Church and maybe Pope Francis mediate. From within the region, former Brazilian president Lula da Silva and Uruguayan president Mujica have indicated willingness to act as brokers. Neither regional leader can be considered neutral, but either individually or as a group, they can be considered relatively honest brokers. So long as they are perceived as seeking the interests of a stable and democratic Venezuela that will work toward reconciliation, they can become acceptable.

However, for the immediate future, the opposition is more united than ever before, believing that they hold the moral high ground: thus, María Corina Machado’s attempt to speak on March 21 before the OAS. Her call for democracy and an end to repression is strengthened by the people she brings with her from Venezuela; an oil worker and union leader, the mother of a young woman slain by the National Guard as she stood on the sidelines of a demonstration one month ago and a student leader. There is nothing elitist about the three witnesses: as working class people, they should have been supporters of Chávez and his successor Maduro. Instead, they come to give personal testimonies before the OAS against the government at the risk of arrest upon their return home.

Without legislative immunity, Machado can only be prosecuted by the Supreme Court, a body which has gradually lost its judicial independence and now acquiesces to presidential requests. In addition to the charge of treason, she anticipates the same criminal charge as that brought against her colleague Leopoldo López, namely incitement to violence. Machado refuses to seek asylum abroad, but will return to Venezuela with the unbounded faith that democracy, the rule of law and respect for human rights will soon be regained. Meantime, she is ready to join 21 other political prisoners in Venezuela’s notorious jails. She knows the experience of Judge María Lourdes Afíuni who spent three and a half years in prison for releasing a businessman on procedural grounds after his pre-trial detention exceeded the constitutional limit. Machado is ready to suffer for her convictions, but we should broadcast her plight, seek the re-establishment of her legislative immunity from prosecution. Furthermore, if imprisoned, we should continue to argue for the release of this courageous woman.

Authors

The process of removing legislative immunity from prosecution for National Assembly member María Corina Machado, the 46-year-old leader of the more activist wing of Venezuela’s opposition, began on March 18. In an emergency session, her fellow legislators voted to remove her immunity and charged her with treason. Two days later she was on a plane to Washington to raise the alarm at the Organization of American States (OAS). Venezuela has become an authoritarian state with political repression, jailing and torture of opponents, reminiscent of the hemisphere’s “Dirty Wars” of the 1980s.

Machado’s colleague, Leopoldo López surrendered to the authorities on February 18 after leading a demonstration that called for the release of students and the respect for democracy. He is held in a military prison charged with incitement to violence, arson and damage to property; the first charge could result in a 10-year sentence. Students are arrested, beaten, raped and released to deter others. Nevertheless, students continue to demonstrate against the government of Nicolás Maduro. Doctors, housewives and union members have joined them. On March 22, hundreds gathered in towns all over Venezuela to protest the arrests of two mayors, one accused of not removing the opposition barricades with sufficient speed. Enzo Scarano could face 10 months in jail. Others demand the end of repression, scarcity of basic foods, over 50 percent inflation and violence by the National Guard and regime henchmen, the paramilitary colectivos. To date, the protests have resulted in 31 deaths, including National Guard members.

With strident political polarization throughout Venezuela’s towns, private production stalling to leave only one to two months inventory supplies and the economy deteriorating fast, the question arises as to who and how the spiraling violence can stop. President Maduro expresses the need for dialogue and has met with the leading producers and manufacturers in Venezuela. However, two weeks later he threatened and charged political opponents, most recently the mayors of San Cristobal and San Diego. In this climate, the opposition is wary of entering into dialogue and has raised their conditions for talks. These now include the removal of Cuban officers from the Venezuelan military. Consequently, prospects for dialogue between the government and political oppositions are dim.

Within Venezuela, people have suggested that the Catholic Church and maybe Pope Francis mediate. From within the region, former Brazilian president Lula da Silva and Uruguayan president Mujica have indicated willingness to act as brokers. Neither regional leader can be considered neutral, but either individually or as a group, they can be considered relatively honest brokers. So long as they are perceived as seeking the interests of a stable and democratic Venezuela that will work toward reconciliation, they can become acceptable.

However, for the immediate future, the opposition is more united than ever before, believing that they hold the moral high ground: thus, María Corina Machado’s attempt to speak on March 21 before the OAS. Her call for democracy and an end to repression is strengthened by the people she brings with her from Venezuela; an oil worker and union leader, the mother of a young woman slain by the National Guard as she stood on the sidelines of a demonstration one month ago and a student leader. There is nothing elitist about the three witnesses: as working class people, they should have been supporters of Chávez and his successor Maduro. Instead, they come to give personal testimonies before the OAS against the government at the risk of arrest upon their return home.

Without legislative immunity, Machado can only be prosecuted by the Supreme Court, a body which has gradually lost its judicial independence and now acquiesces to presidential requests. In addition to the charge of treason, she anticipates the same criminal charge as that brought against her colleague Leopoldo López, namely incitement to violence. Machado refuses to seek asylum abroad, but will return to Venezuela with the unbounded faith that democracy, the rule of law and respect for human rights will soon be regained. Meantime, she is ready to join 21 other political prisoners in Venezuela’s notorious jails. She knows the experience of Judge María Lourdes Afíuni who spent three and a half years in prison for releasing a businessman on procedural grounds after his pre-trial detention exceeded the constitutional limit. Machado is ready to suffer for her convictions, but we should broadcast her plight, seek the re-establishment of her legislative immunity from prosecution. Furthermore, if imprisoned, we should continue to argue for the release of this courageous woman.

Authors

]]>
http://www.brookings.edu/blogs/up-front/posts/2014/02/24-north-american-leaders-summit-negroponte?rssid=negroponted{22B2232B-C121-4EDD-B496-E7D33A589E38}http://webfeeds.brookings.edu/~/77759427/0/brookingsrss/experts/negroponted~North-American-Summit-Beyond-the-Symbols-of-IntegrationNorth American Summit: Beyond the Symbols of Integration

The Mariposa butterfly moves from winter feeding in the hills of Michoacán, through the United States to spend summers in corners of Canada. Its flight is symbolic of the inter-connectedness between the three North American nations. But mariposa herds are declining due to the absence of milkweed on their flight path. Therefore, at their recent meeting in Toluca – not far from the woodlands of Mariposas - Presidents Obama and Peña Nieto and Prime Minister Harper agreed to create a Working Group of experts to ensure that these butterflies thrive once again.

The tri-lateral decision on Mariposa butterflies is symbolic of the multiple decisions announced this week. They can be divided into five categories:

Increase regional competitiveness and trade

Stimulate innovation and education

Define areas of tri-lateral cooperation on energy while continuing coordination within the Coalition on Climate and Clear Air

Increase the participation of civil society on key public issues and cooperate further in support for Central America

This piece will identify the most significant decisions. However, their principal impact is that the range of bread and butter issues discussed among North American governments reflects the breadth of integration. Most issues cannot be characterized as foreign. Instead, we should characterize these issues as “intermestic.” This is the new nature of North American relations.

For a lawyer who participated through the Chamber of Commerce in the NAFTA negotiations over 20 years ago in Mexico City, perhaps the most important is the recognition that NAFTA’s future lies in the negotiations over standards, regulatory measures, protection of intellectual property and government procurement within the Trans Pacific Partnership (TPP). All three North American governments seek to complete these 12 party negotiations by the end of this year. Linking NAFTA’s future to these issues allows integration, trade, economic growth and jobs to expand without re-opening the original agreement. We are now committed to build upon the NAFTA structure.

Second, the prospect of self-sufficiency in oil and gas over the next three years allows our governments to focus more on the limitation of greenhouse gases. Thus the leaders’ decisions to invigorate the Energy and Climate Partnership of the Americas, the Climate and Clean Air Coalition and amend the Montreal Protocol are important.[1] The work of these revitalized bodies must include scientists, representatives from environmental organizations as well as the owners of public utility companies. We must engage climatic and environmental challenges as peoples of North America, not only governments.

Finally, the creation of a Trilateral Council for Research, Development and Innovation recognizes that municipal clusters of manufacturers, scientists, educational leaders and civil society are creating the new advanced manufacturing societies. Federal governments are critical to remove inessential regulatory obstacles to resourceful and responsible spirits at municipal and state levels where creative people work. Establishing transportation corridors among these clusters requires Federal governments to award licenses and constrain abuse while encouraging innovation, research and dynamism at the local level.[2]

Returning to the metaphor of mariposas, the leaders at their Toluca summit recognized the importance of removing the obstacles to fertile feeding grounds for migratory butterflies, protecting the air, habitat and water in order to enlarge this regional species. We all want these creatures to thrive. We all want our respective citizens to find economic and educational opportunities for growth. May be, that was the most important message to emerge from the Mariposa Summit.

Authors

The Mariposa butterfly moves from winter feeding in the hills of Michoacán, through the United States to spend summers in corners of Canada. Its flight is symbolic of the inter-connectedness between the three North American nations. But mariposa herds are declining due to the absence of milkweed on their flight path. Therefore, at their recent meeting in Toluca – not far from the woodlands of Mariposas - Presidents Obama and Peña Nieto and Prime Minister Harper agreed to create a Working Group of experts to ensure that these butterflies thrive once again.

The tri-lateral decision on Mariposa butterflies is symbolic of the multiple decisions announced this week. They can be divided into five categories:

Increase regional competitiveness and trade

Stimulate innovation and education

Define areas of tri-lateral cooperation on energy while continuing coordination within the Coalition on Climate and Clear Air

Increase the participation of civil society on key public issues and cooperate further in support for Central America

This piece will identify the most significant decisions. However, their principal impact is that the range of bread and butter issues discussed among North American governments reflects the breadth of integration. Most issues cannot be characterized as foreign. Instead, we should characterize these issues as “intermestic.” This is the new nature of North American relations.

For a lawyer who participated through the Chamber of Commerce in the NAFTA negotiations over 20 years ago in Mexico City, perhaps the most important is the recognition that NAFTA’s future lies in the negotiations over standards, regulatory measures, protection of intellectual property and government procurement within the Trans Pacific Partnership (TPP). All three North American governments seek to complete these 12 party negotiations by the end of this year. Linking NAFTA’s future to these issues allows integration, trade, economic growth and jobs to expand without re-opening the original agreement. We are now committed to build upon the NAFTA structure.

Second, the prospect of self-sufficiency in oil and gas over the next three years allows our governments to focus more on the limitation of greenhouse gases. Thus the leaders’ decisions to invigorate the Energy and Climate Partnership of the Americas, the Climate and Clean Air Coalition and amend the Montreal Protocol are important.[1] The work of these revitalized bodies must include scientists, representatives from environmental organizations as well as the owners of public utility companies. We must engage climatic and environmental challenges as peoples of North America, not only governments.

Finally, the creation of a Trilateral Council for Research, Development and Innovation recognizes that municipal clusters of manufacturers, scientists, educational leaders and civil society are creating the new advanced manufacturing societies. Federal governments are critical to remove inessential regulatory obstacles to resourceful and responsible spirits at municipal and state levels where creative people work. Establishing transportation corridors among these clusters requires Federal governments to award licenses and constrain abuse while encouraging innovation, research and dynamism at the local level.[2]

Returning to the metaphor of mariposas, the leaders at their Toluca summit recognized the importance of removing the obstacles to fertile feeding grounds for migratory butterflies, protecting the air, habitat and water in order to enlarge this regional species. We all want these creatures to thrive. We all want our respective citizens to find economic and educational opportunities for growth. May be, that was the most important message to emerge from the Mariposa Summit.

Authors

]]>
http://www.brookings.edu/blogs/up-front/posts/2014/02/18-north-american-leaders-toluca-negroponte?rssid=negroponted{30513A33-A0D4-4AEC-993D-123171EE9ED6}http://webfeeds.brookings.edu/~/65479910/0/brookingsrss/experts/negroponted~North-American-Leaders-Meet-in-Toluca-Mexico-What-Can-We-Hope-ForNorth American Leaders Meet in Toluca, Mexico: What Can We Hope For?

President Obama, President Peña and Prime Minister Harper meet at a time of darkening outlook for regional integration within the United States and Canada. There is little political appetite for free trade agreements and integrated energy policies. Despite this, citizens express a preference for trade negotiations within North America over negotiations with Asia and Europe, and significant majorities support trilateral trade within the region. It is time for the private sector and civil society to educate and persuade political leaders on the need for broader integration in trade, investment and energy within a North American production platform.

The North American Free Trade Agreement (NAFTA) provokes a deep yawn because at 20 years old it represents an old type of trade agreement. Instead of acting regionally, the three nations of North America have lapsed into dual bi-lateral discussions, i.e. U.S.-Canada, U.S.-Mexico, and Canada-Mexico. The days of exciting trilateral North American summits peaked in 2004 and subsequent gatherings of leaders focused on security and trade. But, even the Security & Prosperity Partnership was deactivated in 2009. With national problems making summit meetings unwelcome, political leaders left it to the private sector to use the NAFTA framework to develop a North American automobile industry that takes advantage of geographic proximity and complementary wage rates to create a highly competitive regional industry. Today, the aerospace industry is in the process of doing the same, and Mexico’s energy reform presents a significant opportunity for increased production in oil and natural gas.

What should be on the agenda for this North American summit to take place on February 19 in President Pena Nieto’s hometown, Toluca? An October 2013 survey commissioned by The Center for North American Studies at American University identified citizens’ preference to negotiate trade and economic matters in the context of the United States/Canada/Mexico.[1] Despite a sense of stagnation, in both the United States and Canada, those surveyed in all three nations gave priority to negotiating free trade agreements within North America as compared to negotiations with Europe or Asia. Eighty percent of those surveyed in Canada support free trade between North American countries. Seventy-four percent of Mexicans and 65 percent of U.S. citizens surveyed stated the same.[2] Thus, Presidents Obama and Pena Nieto as well as Prime Minister Harper meet in Toluca knowing that today their respective citizens support this regional effort.

Since NAFTA came into force in 1994, foreign direct investment (FDI) in North America has risen from $110 billion per annum in 1992 to $650 billion per annum in 2010.[3] Canada has invested $200 billion per year in the United States, making it the fifth largest investor and the U.S. has invested $310 billion per year in Canada to become its largest foreign investor.[4] Strong macro-economic policies and transparency have contributed confidence to further investment in Mexico, as well as Mexican investments in the United States and Canada. Canada weathered best the economic recession of 2009, but the U.S. economy and the closely associated Mexican economy have emerged adequately with Mexico predicted to grow at over 3 percent in 2014. However, to sustain, if not increase these investment flows, greater private sector and civil society engagement is required.

North American trade has more than trebled from $288.2 billion in 2010 to $547.3 billion in 2012.[5] Every day, $2 billion worth of goods cross our northern border and goods valued at roughly $1 billion per day cross our southern border. According to the U.S. Chamber of Commerce, U.S. exports to North America have risen to $478 billion in 2011, accounting for 32 percent of total goods exported.[6] This increase supports, partway, President Obama’s 2010 National Export Initiative to double U.S. exports within five years. Also, current efforts to harmonize regulatory measures and standards within the Trans Pacific Partnership might be incorporated into trilateral discussion under the NAFTA umbrella. This could begin to take place, whether or not the U.S. Congress approves the Trade Preference Authority (TPA) before our mid-term elections.

In the meantime, the regional production of automobiles and to a lesser extent electronics is not sufficient to create a comprehensive regional production platform. Integrated value chains take advantage of where the product and service is delivered more efficiently. Thus, products and related services constantly move across our three borders. This has accounted for the satisfactory increase in trade and investment flows, but more is needed. Within North America, we should widen the framework for consultations and begin to consider the recognition of professional degrees, discuss the interoperability of Medicare, IMSS and Canadian health care. Furthermore, the inter-operability of stock exchanges lies in our future, as does the regional regulation of hydrocarbons.

The most dynamic potential area for expansion is in energy where North America approaches self-sufficiency in hydrocarbons. The tight oil of North Dakota, the tar sands of Alberta and the shale gas along the Mexican border with Texas deliver the prospect of regional production to meet the energy needs of all three nations, plus natural gas for export. A critical factor in the region’s production of hydrocarbons is Mexico’s constitutional reform and implementing legislation to open up its energy sector. However, substantial challenges remain: a regional energy policy needs to be planned and the North American Working Group (NAEWG) recreated with private sector participation. Regulatory collaboration and the construction of additional cross-border pipelines must begin. To turn the regional dream into reality, governments must license investments in infrastructure to get the energy to market and make energy markets more efficient. All three governments need to address fuel efficiency measures and promote the shift from diesel and gasoline to natural gas in trucks and electrical power for cars.

A majority of people in all three nations remain reluctant, if not ignorant about the potential for energy collaboration and the three governments have a role to educate their respective citizens on the benefits of energy integration. Although those same citizens do not envisage a threat to their national sovereignty through closer economic integration, they are concerned about closer collaboration on hydrocarbons with only 24 percent of those surveyed in the U.S. favoring an integrated energy policy. In Canada, more people surveyed prefer an independent energy policy, a number which rises to 45 percent among those surveyed in Mexico.[7] Governments must focus and educate on the advantages of North American energy integration while recognizing that environmental issues remain politically important in both the United States and Canada. Divergent approaches to regulating carbon emissions highlight the need for a regional conversation on the future of climate change mitigation.

In 1994, the private sector played an indispensable role in communicating the advantages of NAFTA to skeptical publics in all three countries. Well financed publicity campaigns won over the business community and their customers on the importance of regional production to meet global competition. Twenty years later, the private sector and civil society need to play a leadership role again. They need to cajole governments into playing a pro-active role in resolving the infrastructure problems of North America.

If leaders over-promised the opportunities of NAFTA in 1994, they could now respond to the challenges that have developed in the intervening 20 years. In May 2013, Vice President Joe Biden called upon citizens and the private sector to push their respective governments to make North America, “the most prosperous and most economically viable place of the world in the 21st century…”[8] It is now up to us, citizens to make our leaders take up the opportunities of geographic proximity, predictable monetary policies, and greater public security along Mexico’s northern border. Citizens in all three countries are eager for new opportunities to design, manufacture, communicate and print their products for a global market. To meet these needs, all three presidents should lean in to strength NAFTA through the creation of a North American production platform.

[4]NAFTA at Twenty: Accomplishments, Challenges and the Way Forward, Carla A. Hills, statement before the House Committee on Foreign Affairs, Subcommittee on Western Hemisphere, January 15, 2014. Ms. Hills is the Chair of the Inter-American dialogue. http://thedialogue.org/page.cfm?pageID=32&pubID=3505

[5] See n. 3. These statistics are drawn together from OECD, TradeStats Express, U.S. Census Bureau, WTO and Industry Canada.

Authors

President Obama, President Peña and Prime Minister Harper meet at a time of darkening outlook for regional integration within the United States and Canada. There is little political appetite for free trade agreements and integrated energy policies. Despite this, citizens express a preference for trade negotiations within North America over negotiations with Asia and Europe, and significant majorities support trilateral trade within the region. It is time for the private sector and civil society to educate and persuade political leaders on the need for broader integration in trade, investment and energy within a North American production platform.

The North American Free Trade Agreement (NAFTA) provokes a deep yawn because at 20 years old it represents an old type of trade agreement. Instead of acting regionally, the three nations of North America have lapsed into dual bi-lateral discussions, i.e. U.S.-Canada, U.S.-Mexico, and Canada-Mexico. The days of exciting trilateral North American summits peaked in 2004 and subsequent gatherings of leaders focused on security and trade. But, even the Security & Prosperity Partnership was deactivated in 2009. With national problems making summit meetings unwelcome, political leaders left it to the private sector to use the NAFTA framework to develop a North American automobile industry that takes advantage of geographic proximity and complementary wage rates to create a highly competitive regional industry. Today, the aerospace industry is in the process of doing the same, and Mexico’s energy reform presents a significant opportunity for increased production in oil and natural gas.

What should be on the agenda for this North American summit to take place on February 19 in President Pena Nieto’s hometown, Toluca? An October 2013 survey commissioned by The Center for North American Studies at American University identified citizens’ preference to negotiate trade and economic matters in the context of the United States/Canada/Mexico.[1] Despite a sense of stagnation, in both the United States and Canada, those surveyed in all three nations gave priority to negotiating free trade agreements within North America as compared to negotiations with Europe or Asia. Eighty percent of those surveyed in Canada support free trade between North American countries. Seventy-four percent of Mexicans and 65 percent of U.S. citizens surveyed stated the same.[2] Thus, Presidents Obama and Pena Nieto as well as Prime Minister Harper meet in Toluca knowing that today their respective citizens support this regional effort.

Since NAFTA came into force in 1994, foreign direct investment (FDI) in North America has risen from $110 billion per annum in 1992 to $650 billion per annum in 2010.[3] Canada has invested $200 billion per year in the United States, making it the fifth largest investor and the U.S. has invested $310 billion per year in Canada to become its largest foreign investor.[4] Strong macro-economic policies and transparency have contributed confidence to further investment in Mexico, as well as Mexican investments in the United States and Canada. Canada weathered best the economic recession of 2009, but the U.S. economy and the closely associated Mexican economy have emerged adequately with Mexico predicted to grow at over 3 percent in 2014. However, to sustain, if not increase these investment flows, greater private sector and civil society engagement is required.

North American trade has more than trebled from $288.2 billion in 2010 to $547.3 billion in 2012.[5] Every day, $2 billion worth of goods cross our northern border and goods valued at roughly $1 billion per day cross our southern border. According to the U.S. Chamber of Commerce, U.S. exports to North America have risen to $478 billion in 2011, accounting for 32 percent of total goods exported.[6] This increase supports, partway, President Obama’s 2010 National Export Initiative to double U.S. exports within five years. Also, current efforts to harmonize regulatory measures and standards within the Trans Pacific Partnership might be incorporated into trilateral discussion under the NAFTA umbrella. This could begin to take place, whether or not the U.S. Congress approves the Trade Preference Authority (TPA) before our mid-term elections.

In the meantime, the regional production of automobiles and to a lesser extent electronics is not sufficient to create a comprehensive regional production platform. Integrated value chains take advantage of where the product and service is delivered more efficiently. Thus, products and related services constantly move across our three borders. This has accounted for the satisfactory increase in trade and investment flows, but more is needed. Within North America, we should widen the framework for consultations and begin to consider the recognition of professional degrees, discuss the interoperability of Medicare, IMSS and Canadian health care. Furthermore, the inter-operability of stock exchanges lies in our future, as does the regional regulation of hydrocarbons.

The most dynamic potential area for expansion is in energy where North America approaches self-sufficiency in hydrocarbons. The tight oil of North Dakota, the tar sands of Alberta and the shale gas along the Mexican border with Texas deliver the prospect of regional production to meet the energy needs of all three nations, plus natural gas for export. A critical factor in the region’s production of hydrocarbons is Mexico’s constitutional reform and implementing legislation to open up its energy sector. However, substantial challenges remain: a regional energy policy needs to be planned and the North American Working Group (NAEWG) recreated with private sector participation. Regulatory collaboration and the construction of additional cross-border pipelines must begin. To turn the regional dream into reality, governments must license investments in infrastructure to get the energy to market and make energy markets more efficient. All three governments need to address fuel efficiency measures and promote the shift from diesel and gasoline to natural gas in trucks and electrical power for cars.

A majority of people in all three nations remain reluctant, if not ignorant about the potential for energy collaboration and the three governments have a role to educate their respective citizens on the benefits of energy integration. Although those same citizens do not envisage a threat to their national sovereignty through closer economic integration, they are concerned about closer collaboration on hydrocarbons with only 24 percent of those surveyed in the U.S. favoring an integrated energy policy. In Canada, more people surveyed prefer an independent energy policy, a number which rises to 45 percent among those surveyed in Mexico.[7] Governments must focus and educate on the advantages of North American energy integration while recognizing that environmental issues remain politically important in both the United States and Canada. Divergent approaches to regulating carbon emissions highlight the need for a regional conversation on the future of climate change mitigation.

In 1994, the private sector played an indispensable role in communicating the advantages of NAFTA to skeptical publics in all three countries. Well financed publicity campaigns won over the business community and their customers on the importance of regional production to meet global competition. Twenty years later, the private sector and civil society need to play a leadership role again. They need to cajole governments into playing a pro-active role in resolving the infrastructure problems of North America.

If leaders over-promised the opportunities of NAFTA in 1994, they could now respond to the challenges that have developed in the intervening 20 years. In May 2013, Vice President Joe Biden called upon citizens and the private sector to push their respective governments to make North America, “the most prosperous and most economically viable place of the world in the 21st century…”[8] It is now up to us, citizens to make our leaders take up the opportunities of geographic proximity, predictable monetary policies, and greater public security along Mexico’s northern border. Citizens in all three countries are eager for new opportunities to design, manufacture, communicate and print their products for a global market. To meet these needs, all three presidents should lean in to strength NAFTA through the creation of a North American production platform.

[4]NAFTA at Twenty: Accomplishments, Challenges and the Way Forward, Carla A. Hills, statement before the House Committee on Foreign Affairs, Subcommittee on Western Hemisphere, January 15, 2014. Ms. Hills is the Chair of the Inter-American dialogue. http://thedialogue.org/page.cfm?pageID=32&pubID=3505

[5] See n. 3. These statistics are drawn together from OECD, TradeStats Express, U.S. Census Bureau, WTO and Industry Canada.

Authors

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http://www.brookings.edu/blogs/up-front/posts/2014/02/14-democratic-institutions-el-salvador-fmln-negroponte?rssid=negroponted{208F953D-7920-440A-A1BA-1E5819AAE5B6}http://webfeeds.brookings.edu/~/65479911/0/brookingsrss/experts/negroponted~Concerns-for-Democratic-Institutions-in-El-Salvador-After-FMLN-First-Round-WinConcerns for Democratic Institutions in El Salvador After FMLN First Round Win

Salvador Sánchez Cerén, the former school teacher, ‘comandante’ of guerilla forces and current vice-president of the FMLN, was the clear winner in the February 2 presidential election. With a 10 point lead in the first of two rounds, it will be hard for the rightist party, ARENA to overcome strong preference in Salvador’s rural areas for continued social programs. However, with a weakened and fragmented rightist party, can the FMLN resist following Nicaragua’s path to strengthen presidential power and weaken democratic institutions?

The first round of the Salvadoran presidential elections on February 2 resulted in a 10 point lead for the FMLN candidate, Salvador Sánchez Cerén. Norman Quijano from the ARENA gained the next number of votes, but neither achieved the 50 percent plus one needed to win on the first round. Therefore, both these candidates automatically started their respective campaigns for a second round on March 5. Although a looser on the first round, the former president, Elías Antonio “Tony” Saca from the coalition of center right parties, Movimiento UNIDAD could play a critical role in the second round. His constituents could narrow the gap between the two major parties creating a more competitive election. This paper examines both the political consequences of the presidential election’s first round and analyzes what we might expect in, and beyond the second round on March 9.

First, the ideological divide between the leftist, FMLN and the business party, ARENA is deep. Since the end of El Salvador’s civil war in 1992, we have not witnessed such a political abyss. Second, Sánchez Cerén will need to demonstrate that Venezuela’s influence and money can be kept at arms length. He may need to enter into a coalition with Tony Saca to assuage fears that the FMLNwill not pursue communist or ‘chavista’ policies. (The late Hugo Chavez has given his name to the Bolivarian socialism which characterizes Venezuela, Nicaragua, Bolivia and to a degree, Ecuador.) Third, pollsters are discredited due to their lack of transparency and erroneous predictions. Fourth, the ideological differences between the two major parties are now clearer for the voters. Salvadoran observers have narrowed the choice down to a “socialist” or “free market” system.[1] We might add the choice between a Salvadoran solution to the nation’s problems, or a preference for the Nicaraguan model of a stable economic regime that attracts foreign investment at the cost of weak democratic institutions.

Political polarization:

Norman Quijano of the business party, ARENA focused on the communist background of his opponent, the need for harsher treatment of gang leaders and the formation of “military farms” to intern young people who neither work nor study. These punitive messages failed to resonate with El Salvador’s majority of rural voters, particularly those on the coastal plane which traditionally have supported ARENA candidates. Quijano won 38.96 percent with 1.047 million votes. Observers consider that he ran an old fashioned campaign that failed to persuade voters that poor GDP growth, averaging 1.3 percent growth over the last four years compared to 4.2 percent growth in Nicaragua and low foreign direct investment have not produced the economic development seen in neighboring Central American nations. Quijano gained the majority in the four biggest cities, where a more educated and prosperous population voted, but he failed miserably in the rural areas. This included losses in the Pacific coastal region which has traditionally voted for conservative candidates, including ARENA’s founder Roberto D’Aubuisson. In 2014, ARENA’s base was the educated and more prosperous urban vote.

In contrast, Sánchez Cerén won 48.93 percent with 1.315 million votes. He pointed to the significant reduction in homicides from 14 to five per day without explicitly stating that he supported the March 2012 truce negotiated by the Catholic Church with the gang leaders from the Mara Salvatrucha and the 16th Street. He avoided political debates in which he is the weaker contestant, preferring to engage with citizens at large rallies. All those gatherings were peaceful and despite warnings from ARENA that violence would threaten the presidential campaign, the weeks before and voting day itself were orderly. Salvadorans value representative democracy, but it can be threatened by outside money and a return to political clientelism.

Tony Saca’s Movimiento UNIDAD was a coalition of three center right parties that held together in the hope that Saca’s magnetism could succeed. Until the last few weeks of the campaign, polls had showed a strong following for Saca. On this basis, as well as alleged financial inducements, Saca was able to hold the coalition together during the campaign, but the day after the election UNIDAD fractured. This split among center right parties may be followed by further splintering within ARENA. A dismal campaign, the low turnout of its base and serious headwinds that Norman Quijano faces as he heads into the second round could result in disillusionment among conservatives and a search for alternatives.

Politics in El Salvador are increasingly transactional. Politicians move to wherever the greatest personal benefit is to be found. Small parties emerge around a candidate and follow the leader in the expectation of jobs and positions in the public sector. The Movimiento UNIDAD is a clear example of this. In 2012, members of the National Assembly rebelled against the decision of the Supreme Court’s Constitutional Chamber and preferred to ignore the independence of the judiciary by seeking an interpretation of El Salvador’s constitution at the Inter-American Court of Justice. The issue was whether legislatures could nominate and vote for two sets of Supreme Court justices during one congressional term of office, or whether the constitution restricted them to nominating and voting for one set of justices, each of whom are allied – in a greater or lesser degree – to a political party. Only significant outside pressure obliged the legislatures to compromise and accept the supremacy of Salvador’s highest court on constitutional matters. The political nomination of judges remains a problem in El Salvador, but the relative independence and maximum authority of the Supreme Court was assured for now.

Outside influence and money:

According to a study by the University of Salamanca, ALBA Petróleos has $800 million worth of assets in El Salvador.[2] ALBA Petróleos is funded by the Venezuelan state oil company, PDVSA in a joint venture with 24 Salvadoran mayors from the FMLN. These mayors formed an association, which Spanish acronym is ENEPASA, to enable El Salvador to participate in Venezuela’s PetroCaribe. PDVSA owns 60 percent and ENEPASA; 40 percent of ALBA Petróleos. The purpose is to provide hydrocarbons at subsidized prices and support social programs, such as hospitals, schools, sports and to distribute, at subsidized prices, agricultural products and seeds. According to the Salamanca study, in 2010 ALBA Petróleos distributed $140 million in subsidies and social programs in the 24 municipalities led by FMLN mayors. Salvadoran media covers the distributions widely and picture the close relationship between ALBA Petróleos and the political leaders. Formally, a private joint venture of Salvadoran citizens, few doubt that the Venezuelan government is disinterested in the purpose and use of these monies. In a country whose per annual capital income is $3,799, the targeted distribution of ALBA funds can provide much needed support. They can also re-enforce old fashioned clientelism.

To mitigate the image of a former communist ‘comandante’ presiding over the Salvadoran state, Sánchez Cerén may seek a coalition with Tony Saca, the former president from the conservative party who won 11.44 percent of the vote. However, any coalition with Saca carries perils. Saca is widely rumored to have enriched himself handsomely during his presidency and he has freed his coalition partners to vote as they choose. A fractured party is an unpredictable political force with its members choosing their own personal advantage.

The errors of pollsters:

Pollsters retained by distinct political parties and their allies reinforced the strengths of their clients. In El Salvador, only CID Gallop poll consistently gave the majority to the FMLN candidate. There is likely to be little confidence in pollsters’ predictions as we approach the second round on March 9.

The future of El Salvador’s democratic institutions:

ARENA has little chance to overcome Sánchez Cerén’s 10 point lead. Furthermore, Sánchez Cerén is reputed to be honest, modest and fair. He is trusted as a sincere man of the left. The concern is not for the election of a leftist president because the hemisphere has several notable presidents who lead a “new left” governments that combine liberal free market economies with distributive social policies. Brazil and Peru are good examples. Instead, the concern is for the future of El Salvador’s democracy, built carefully as an integral part of El Salvador’s peace agreement.[3]

Should ARENA and UNIDAD fragment after this politically disastrous first round, which political party will stand to contest the early signs of centralization in the presidency and weakened political institutions? Since the Peace Agreement of January 1992, the FMLN has played by the democratic rules because strong political competition has prevented any one party from eroding the checks and balances of the democratic state. Should the FMLN continue to nominate its candidates to the National Assembly, picking malleable candidates without serious contestation from ARENA, we might anticipate a legislature deprived of the ability to contest the executive.

Already, the federal Electoral Tribunal has failed to constrain President Funes, as a government official, from advocating for a political candidate in violation of El Salvador’s constitution. Funes dominated the airwaves breaching the required balance of radio and TV time for each party. Second, despite the constitutional requirement that the Electoral Tribunal represent the major parties, there is currently no representative from ARENA on this tribunal. (In 2012, ARENA’s man moved to Tony Saca’s party.) Third, to contest the criticism that only 53.8 percent of Salvadorans voted – a relatively low number in comparison with previous elections – the Electoral Tribunal announced four days after the election that the turnout was 64 percent based on the fact that people failed to renew their voter registration thereby reducing the number of those eligible to vote. The Tribunal chose to ignore the hypothesis that a failure to register indicated a disinterest in participating in the election.

Furthermore, the electoral tribunal failed to restrain ALBA Petróleos actions despite the fact that Section 67 of the electoral law prohibits contributions to political parties from government institutions or businesses owned by a foreign state. PDVSA’s 60 percent interest in ALBA Petróleos makes it a foreign business owned by the Venezuelan government. Section 67 also prohibits contributions from political parties and agencies of a foreign government.

Conclusion:

Funes is not President Daniel Ortega of Nicaragua, but he might admire Ortega’s capacity to transact successful business with the corporate sector and ensure a steady inflow of foreign direct investment to support the buoyant export of agricultural and manufacturing products. Ortega has delivered 4.4 percent GDP growth in 2013 and greater welfare benefits. However, the cost to Nicaragua is the destruction of an independent judiciary, deterioration in the rule of law and the manipulation of the National Assembly to enact laws favored by the President. Nicaragua’s reliance on PetroCaribe has provided vital energy support to the Nicaraguan economy, paid for through its exports to Venezuela. El Salvador’s next president may choose to emulate this pattern should the 2nd round remove effective political competition.

The FMLN have proved to be fierce defenders of El Salvador’s constitution in the 22 years since the Peace Agreements enabled their leaders to drop their guns and enter the political arena. The defense of these democratic institutions has encouraged the U.S. Congress, USAID, the Millenium Challenge Corporation (MCC), the European Union and the IMF to extend significant grants and loans to bolster El Salvador’s free market economy and strengthen its judicial institutions. However, a future weakening of democratic institutions risks lowering U.S support.

The United States government and its Embassy in San Salvador have remained neutral observers, but that does not mean that U.S. observers should turn a blind eye to undemocratic tendencies which would damage El Salvador’s future relations with the United States.

Authors

Salvador Sánchez Cerén, the former school teacher, ‘comandante’ of guerilla forces and current vice-president of the FMLN, was the clear winner in the February 2 presidential election. With a 10 point lead in the first of two rounds, it will be hard for the rightist party, ARENA to overcome strong preference in Salvador’s rural areas for continued social programs. However, with a weakened and fragmented rightist party, can the FMLN resist following Nicaragua’s path to strengthen presidential power and weaken democratic institutions?

The first round of the Salvadoran presidential elections on February 2 resulted in a 10 point lead for the FMLN candidate, Salvador Sánchez Cerén. Norman Quijano from the ARENA gained the next number of votes, but neither achieved the 50 percent plus one needed to win on the first round. Therefore, both these candidates automatically started their respective campaigns for a second round on March 5. Although a looser on the first round, the former president, Elías Antonio “Tony” Saca from the coalition of center right parties, Movimiento UNIDAD could play a critical role in the second round. His constituents could narrow the gap between the two major parties creating a more competitive election. This paper examines both the political consequences of the presidential election’s first round and analyzes what we might expect in, and beyond the second round on March 9.

First, the ideological divide between the leftist, FMLN and the business party, ARENA is deep. Since the end of El Salvador’s civil war in 1992, we have not witnessed such a political abyss. Second, Sánchez Cerén will need to demonstrate that Venezuela’s influence and money can be kept at arms length. He may need to enter into a coalition with Tony Saca to assuage fears that the FMLNwill not pursue communist or ‘chavista’ policies. (The late Hugo Chavez has given his name to the Bolivarian socialism which characterizes Venezuela, Nicaragua, Bolivia and to a degree, Ecuador.) Third, pollsters are discredited due to their lack of transparency and erroneous predictions. Fourth, the ideological differences between the two major parties are now clearer for the voters. Salvadoran observers have narrowed the choice down to a “socialist” or “free market” system.[1] We might add the choice between a Salvadoran solution to the nation’s problems, or a preference for the Nicaraguan model of a stable economic regime that attracts foreign investment at the cost of weak democratic institutions.

Political polarization:

Norman Quijano of the business party, ARENA focused on the communist background of his opponent, the need for harsher treatment of gang leaders and the formation of “military farms” to intern young people who neither work nor study. These punitive messages failed to resonate with El Salvador’s majority of rural voters, particularly those on the coastal plane which traditionally have supported ARENA candidates. Quijano won 38.96 percent with 1.047 million votes. Observers consider that he ran an old fashioned campaign that failed to persuade voters that poor GDP growth, averaging 1.3 percent growth over the last four years compared to 4.2 percent growth in Nicaragua and low foreign direct investment have not produced the economic development seen in neighboring Central American nations. Quijano gained the majority in the four biggest cities, where a more educated and prosperous population voted, but he failed miserably in the rural areas. This included losses in the Pacific coastal region which has traditionally voted for conservative candidates, including ARENA’s founder Roberto D’Aubuisson. In 2014, ARENA’s base was the educated and more prosperous urban vote.

In contrast, Sánchez Cerén won 48.93 percent with 1.315 million votes. He pointed to the significant reduction in homicides from 14 to five per day without explicitly stating that he supported the March 2012 truce negotiated by the Catholic Church with the gang leaders from the Mara Salvatrucha and the 16th Street. He avoided political debates in which he is the weaker contestant, preferring to engage with citizens at large rallies. All those gatherings were peaceful and despite warnings from ARENA that violence would threaten the presidential campaign, the weeks before and voting day itself were orderly. Salvadorans value representative democracy, but it can be threatened by outside money and a return to political clientelism.

Tony Saca’s Movimiento UNIDAD was a coalition of three center right parties that held together in the hope that Saca’s magnetism could succeed. Until the last few weeks of the campaign, polls had showed a strong following for Saca. On this basis, as well as alleged financial inducements, Saca was able to hold the coalition together during the campaign, but the day after the election UNIDAD fractured. This split among center right parties may be followed by further splintering within ARENA. A dismal campaign, the low turnout of its base and serious headwinds that Norman Quijano faces as he heads into the second round could result in disillusionment among conservatives and a search for alternatives.

Politics in El Salvador are increasingly transactional. Politicians move to wherever the greatest personal benefit is to be found. Small parties emerge around a candidate and follow the leader in the expectation of jobs and positions in the public sector. The Movimiento UNIDAD is a clear example of this. In 2012, members of the National Assembly rebelled against the decision of the Supreme Court’s Constitutional Chamber and preferred to ignore the independence of the judiciary by seeking an interpretation of El Salvador’s constitution at the Inter-American Court of Justice. The issue was whether legislatures could nominate and vote for two sets of Supreme Court justices during one congressional term of office, or whether the constitution restricted them to nominating and voting for one set of justices, each of whom are allied – in a greater or lesser degree – to a political party. Only significant outside pressure obliged the legislatures to compromise and accept the supremacy of Salvador’s highest court on constitutional matters. The political nomination of judges remains a problem in El Salvador, but the relative independence and maximum authority of the Supreme Court was assured for now.

Outside influence and money:

According to a study by the University of Salamanca, ALBA Petróleos has $800 million worth of assets in El Salvador.[2] ALBA Petróleos is funded by the Venezuelan state oil company, PDVSA in a joint venture with 24 Salvadoran mayors from the FMLN. These mayors formed an association, which Spanish acronym is ENEPASA, to enable El Salvador to participate in Venezuela’s PetroCaribe. PDVSA owns 60 percent and ENEPASA; 40 percent of ALBA Petróleos. The purpose is to provide hydrocarbons at subsidized prices and support social programs, such as hospitals, schools, sports and to distribute, at subsidized prices, agricultural products and seeds. According to the Salamanca study, in 2010 ALBA Petróleos distributed $140 million in subsidies and social programs in the 24 municipalities led by FMLN mayors. Salvadoran media covers the distributions widely and picture the close relationship between ALBA Petróleos and the political leaders. Formally, a private joint venture of Salvadoran citizens, few doubt that the Venezuelan government is disinterested in the purpose and use of these monies. In a country whose per annual capital income is $3,799, the targeted distribution of ALBA funds can provide much needed support. They can also re-enforce old fashioned clientelism.

To mitigate the image of a former communist ‘comandante’ presiding over the Salvadoran state, Sánchez Cerén may seek a coalition with Tony Saca, the former president from the conservative party who won 11.44 percent of the vote. However, any coalition with Saca carries perils. Saca is widely rumored to have enriched himself handsomely during his presidency and he has freed his coalition partners to vote as they choose. A fractured party is an unpredictable political force with its members choosing their own personal advantage.

The errors of pollsters:

Pollsters retained by distinct political parties and their allies reinforced the strengths of their clients. In El Salvador, only CID Gallop poll consistently gave the majority to the FMLN candidate. There is likely to be little confidence in pollsters’ predictions as we approach the second round on March 9.

The future of El Salvador’s democratic institutions:

ARENA has little chance to overcome Sánchez Cerén’s 10 point lead. Furthermore, Sánchez Cerén is reputed to be honest, modest and fair. He is trusted as a sincere man of the left. The concern is not for the election of a leftist president because the hemisphere has several notable presidents who lead a “new left” governments that combine liberal free market economies with distributive social policies. Brazil and Peru are good examples. Instead, the concern is for the future of El Salvador’s democracy, built carefully as an integral part of El Salvador’s peace agreement.[3]

Should ARENA and UNIDAD fragment after this politically disastrous first round, which political party will stand to contest the early signs of centralization in the presidency and weakened political institutions? Since the Peace Agreement of January 1992, the FMLN has played by the democratic rules because strong political competition has prevented any one party from eroding the checks and balances of the democratic state. Should the FMLN continue to nominate its candidates to the National Assembly, picking malleable candidates without serious contestation from ARENA, we might anticipate a legislature deprived of the ability to contest the executive.

Already, the federal Electoral Tribunal has failed to constrain President Funes, as a government official, from advocating for a political candidate in violation of El Salvador’s constitution. Funes dominated the airwaves breaching the required balance of radio and TV time for each party. Second, despite the constitutional requirement that the Electoral Tribunal represent the major parties, there is currently no representative from ARENA on this tribunal. (In 2012, ARENA’s man moved to Tony Saca’s party.) Third, to contest the criticism that only 53.8 percent of Salvadorans voted – a relatively low number in comparison with previous elections – the Electoral Tribunal announced four days after the election that the turnout was 64 percent based on the fact that people failed to renew their voter registration thereby reducing the number of those eligible to vote. The Tribunal chose to ignore the hypothesis that a failure to register indicated a disinterest in participating in the election.

Furthermore, the electoral tribunal failed to restrain ALBA Petróleos actions despite the fact that Section 67 of the electoral law prohibits contributions to political parties from government institutions or businesses owned by a foreign state. PDVSA’s 60 percent interest in ALBA Petróleos makes it a foreign business owned by the Venezuelan government. Section 67 also prohibits contributions from political parties and agencies of a foreign government.

Conclusion:

Funes is not President Daniel Ortega of Nicaragua, but he might admire Ortega’s capacity to transact successful business with the corporate sector and ensure a steady inflow of foreign direct investment to support the buoyant export of agricultural and manufacturing products. Ortega has delivered 4.4 percent GDP growth in 2013 and greater welfare benefits. However, the cost to Nicaragua is the destruction of an independent judiciary, deterioration in the rule of law and the manipulation of the National Assembly to enact laws favored by the President. Nicaragua’s reliance on PetroCaribe has provided vital energy support to the Nicaraguan economy, paid for through its exports to Venezuela. El Salvador’s next president may choose to emulate this pattern should the 2nd round remove effective political competition.

The FMLN have proved to be fierce defenders of El Salvador’s constitution in the 22 years since the Peace Agreements enabled their leaders to drop their guns and enter the political arena. The defense of these democratic institutions has encouraged the U.S. Congress, USAID, the Millenium Challenge Corporation (MCC), the European Union and the IMF to extend significant grants and loans to bolster El Salvador’s free market economy and strengthen its judicial institutions. However, a future weakening of democratic institutions risks lowering U.S support.

The United States government and its Embassy in San Salvador have remained neutral observers, but that does not mean that U.S. observers should turn a blind eye to undemocratic tendencies which would damage El Salvador’s future relations with the United States.

Editor's note: Diana Villiers Negroponte, nonresident senior fellow with the Latin America Initiative at Brookings, is author of Seeking Peace in El Salvador: The Struggle to Reconstruct the Nation at the End of the Cold War (Palgrave Macmillan, 2012).

On February 2, Salvadorans will go to the polls to elect their next president for a five-year term. In addition to the 4 million eligible to vote in El Salvador, 10,337 Salvadorans living in the United States have registered to vote. What is at stake for them and for the U.S.?

For decades, relations between El Salvador and the United States have been very close. One out of every four Salvadorans lives in the U.S., sending over $4 billion home each year. This amounts to approximately 17 percent of the country’s GDP. Furthermore, El Salvador adopted the U.S. dollar with the intent to stabilize the economy, expand exports and encourage investment.

El Salvador was the only nation in Latin America to send troops to Iraq, in recognition for which Washington granted Temporary Protective Status to 220,000 Salvadorans annually who would otherwise be deported. Perhaps the most critical bilateral issue is the decision to grant a second Millennium Challenge Grant of $277 million to El Salvador. Although the Millennium Challenge Corporation (MCC) has approved the grant, congressional action is still required. U.S. congressional leaders have expressed the desire to see an investment climate conducive to foreign investment, further measures against corruption and commitment to the rule of law. The three largest political parties competing in the forthcoming election approach these issues from somewhat different perspectives.

In the first round of presidential elections, the candidate for the left-leaning Farabundo Martí para la Liberación Nacional (FMLN) is the current Vice President, Salvador Sánchez Cerén. He was one of the five comandantes during El Salvador’s civil war (1980-1992), earning a reputation for consensus building with other FMLN leaders and well-organized community programs for Salvadoran refugees who returned to their country in 1984 as part of a two-pronged counterinsurgency program. His main opponent is the Alianza Republicana Nacionalista (ARENA) candidate, Norman Quijano, the mayor of San Salvador. He has earned a reputation of building safe communities which both prevent youth from joining the gangs and re-integrating those willing to leave the life of crime. Both these parties gain support from approximately 30 percent of those surveyed in the last few weeks. A former president, Antonio Saca (2004-2009) has created a third party, UNIDAD. This is a coalition (of center-left and center-right parties) which leans right, but has often voted with the FMLN in the National Assembly against ARENA. If neither major party wins 50 percent plus one majority on February 2, Saca may have the opportunity to become the king-maker in the run-off election scheduled for March 9. Saca himself is alleged to have enriched himself demonstrably during his presidency and is unlikely to play a government role, but his political skills give him the opportunity to influence electoral outcomes.

The electoral campaign has revived ancient class hostilities that led El Salvador through a 12-year civil war resulting in over 75,000 deaths and half a million people displaced, many of whom sought refugee status in the United States. ARENA represents the business community and commitment to a free-market economy. FMLN favors a planned economy, although the last five years have demonstrated efforts to gain the trust of the business community and set up public-private partnerships in energy and infrastructure projects. UNIDAD is tainted by the alleged corruption of its leader, but otherwise favors a liberal market economy.

All three parties favor strengthening the rule of law, and none are prepared to endorse the March 2012 truce between the jailed gang leaders despite the fact that it has halved the number of gang related murders. In the face of continued violence and widespread extortion, voters give priority to strengthening security over the second most important issue, namely jobs and the economy. Regretfully, the candidates have not debated the substantive issues so much as corruption within each of the parties and rumors of FMLN alliance with the Venezuelan led, ALBA group.

In the midst of intense partisanship, the winner of these elections will face daunting tasks: The Constitutional Court will hear a case to determine whether the amnesty law – an integral part of the 1992 peace agreement – is compatible with commitments made to the Inter-American Commission on Human Rights. That amnesty protected abusers of human rights on both sides, although the U.N. reported in 1995 that government forces were responsible for over 80 percent of the crimes. Unraveling that issue could strain reconciliation efforts that both ARENA and FMLN government have sought to respect. Second, containing gang violence requires significant investment in education, job training and new sources of legitimate work. In order to attract this investment, the next president must gain the confidence of the international business community. Finally, outbursts of violence such as the ransacking of the human right’s office, Asociación Pro-Búsqueda, in November 2013 remind Salvadorans of para-military actions carried out during the civil war. (This office has helped find the natural parents for hundreds of infants snatched by the military from their families during that war.) Peace agreements undo unless leaders from all sectors of national life remain committed to uphold the institutions which support that peace.

The U.S. role is to remain firmly neutral. U.S. Rep. Eliot Engel has emphasized the importance of “inexorable neutrality in these elections.” However, others in Congress and in private life have taken preferred positions, using the media to criticize the FMLN and potential links to foreign alliances. This does not help Salvadorans make up their own minds on the future of their country. Except for the youngest voters, Salvadorans have experienced their own cruel history and now seek a more peaceful and prosperous future. Although keen observers, we should remain neutral on the outcome.

Authors

Editor's note: Diana Villiers Negroponte, nonresident senior fellow with the Latin America Initiative at Brookings, is author of Seeking Peace in El Salvador: The Struggle to Reconstruct the Nation at the End of the Cold War (Palgrave Macmillan, 2012).

On February 2, Salvadorans will go to the polls to elect their next president for a five-year term. In addition to the 4 million eligible to vote in El Salvador, 10,337 Salvadorans living in the United States have registered to vote. What is at stake for them and for the U.S.?

For decades, relations between El Salvador and the United States have been very close. One out of every four Salvadorans lives in the U.S., sending over $4 billion home each year. This amounts to approximately 17 percent of the country’s GDP. Furthermore, El Salvador adopted the U.S. dollar with the intent to stabilize the economy, expand exports and encourage investment.

El Salvador was the only nation in Latin America to send troops to Iraq, in recognition for which Washington granted Temporary Protective Status to 220,000 Salvadorans annually who would otherwise be deported. Perhaps the most critical bilateral issue is the decision to grant a second Millennium Challenge Grant of $277 million to El Salvador. Although the Millennium Challenge Corporation (MCC) has approved the grant, congressional action is still required. U.S. congressional leaders have expressed the desire to see an investment climate conducive to foreign investment, further measures against corruption and commitment to the rule of law. The three largest political parties competing in the forthcoming election approach these issues from somewhat different perspectives.

In the first round of presidential elections, the candidate for the left-leaning Farabundo Martí para la Liberación Nacional (FMLN) is the current Vice President, Salvador Sánchez Cerén. He was one of the five comandantes during El Salvador’s civil war (1980-1992), earning a reputation for consensus building with other FMLN leaders and well-organized community programs for Salvadoran refugees who returned to their country in 1984 as part of a two-pronged counterinsurgency program. His main opponent is the Alianza Republicana Nacionalista (ARENA) candidate, Norman Quijano, the mayor of San Salvador. He has earned a reputation of building safe communities which both prevent youth from joining the gangs and re-integrating those willing to leave the life of crime. Both these parties gain support from approximately 30 percent of those surveyed in the last few weeks. A former president, Antonio Saca (2004-2009) has created a third party, UNIDAD. This is a coalition (of center-left and center-right parties) which leans right, but has often voted with the FMLN in the National Assembly against ARENA. If neither major party wins 50 percent plus one majority on February 2, Saca may have the opportunity to become the king-maker in the run-off election scheduled for March 9. Saca himself is alleged to have enriched himself demonstrably during his presidency and is unlikely to play a government role, but his political skills give him the opportunity to influence electoral outcomes.

The electoral campaign has revived ancient class hostilities that led El Salvador through a 12-year civil war resulting in over 75,000 deaths and half a million people displaced, many of whom sought refugee status in the United States. ARENA represents the business community and commitment to a free-market economy. FMLN favors a planned economy, although the last five years have demonstrated efforts to gain the trust of the business community and set up public-private partnerships in energy and infrastructure projects. UNIDAD is tainted by the alleged corruption of its leader, but otherwise favors a liberal market economy.

All three parties favor strengthening the rule of law, and none are prepared to endorse the March 2012 truce between the jailed gang leaders despite the fact that it has halved the number of gang related murders. In the face of continued violence and widespread extortion, voters give priority to strengthening security over the second most important issue, namely jobs and the economy. Regretfully, the candidates have not debated the substantive issues so much as corruption within each of the parties and rumors of FMLN alliance with the Venezuelan led, ALBA group.

In the midst of intense partisanship, the winner of these elections will face daunting tasks: The Constitutional Court will hear a case to determine whether the amnesty law – an integral part of the 1992 peace agreement – is compatible with commitments made to the Inter-American Commission on Human Rights. That amnesty protected abusers of human rights on both sides, although the U.N. reported in 1995 that government forces were responsible for over 80 percent of the crimes. Unraveling that issue could strain reconciliation efforts that both ARENA and FMLN government have sought to respect. Second, containing gang violence requires significant investment in education, job training and new sources of legitimate work. In order to attract this investment, the next president must gain the confidence of the international business community. Finally, outbursts of violence such as the ransacking of the human right’s office, Asociación Pro-Búsqueda, in November 2013 remind Salvadorans of para-military actions carried out during the civil war. (This office has helped find the natural parents for hundreds of infants snatched by the military from their families during that war.) Peace agreements undo unless leaders from all sectors of national life remain committed to uphold the institutions which support that peace.

The U.S. role is to remain firmly neutral. U.S. Rep. Eliot Engel has emphasized the importance of “inexorable neutrality in these elections.” However, others in Congress and in private life have taken preferred positions, using the media to criticize the FMLN and potential links to foreign alliances. This does not help Salvadorans make up their own minds on the future of their country. Except for the youngest voters, Salvadorans have experienced their own cruel history and now seek a more peaceful and prosperous future. Although keen observers, we should remain neutral on the outcome.

Event Information

On January 16, the Latin America Initiative and the Energy Security Initiative at Brookings hosted Fluvio Ruiz Alarcón, Diana Negroponte and Ambassador Arturo Sarukhan for a review of the key challenges that lie ahead for Mexico’s energy reforms, now that preliminary constitutional reforms have passed. Questions remain regarding the regulation of the energy industry, the balance between the public and private sector, and implications for Mexican – and more broadly North American – energy security.

Seventy five years after the nationalization of the oil company, Petróleos Mexicanos (PEMEX), the December constitutional reforms opened the energy sector to private investment and will transform PEMEX from a government agency to a productive state enterprise. Though oil and gas in the subsoil will remain in the hands of the Mexican people, licenses and production sharing can be employed from the wellhead onwards. The ability of PEMEX to enter into joint ventures has the potential to speed up the exploration and exploitation of hydrocarbons in the Mexican territory, though such profit sharing or service contracts also pose regulatory and political challenges.

As the Mexican state will no longer be the single operator of energy in Mexico, the state must develop its regulatory capacity and competence to continue to ensure Mexican energy security. PEMEX currently provides over 30 percent of Mexican government revenue, but the state must ensure PEMEX’s budget autonomy going forward and avoid overregulation. This will support PEMEX’s ability to re-invest in its own wells and become competitive with private oil companies, as the law requires it to do.

Moreover, political consensus with regard to the secondary legislation will be critical in supporting the engagement of the private sector. The government must “win the street” and convince public opinion that the new model will not transfer a public monopoly to a new monopoly in the hands of the private sector. An additional challenge will be the ability to institutionalize and enshrine the independence and autonomy of the four new regulatory agencies recently approved to manage the auction of the bids, industrial safety, environmental issues and transportation of gas.

Nevertheless, the energy reforms hold great potential not only within Mexico but also for its ability attract investment and leverage its economic power to build global geopolitical clout. Putting energy at the center of discussions on deepening NAFTA can help ensure that that the reforms are not only a turning point for Mexico but also for the security of North America.

Event Information

On January 16, the Latin America Initiative and the Energy Security Initiative at Brookings hosted Fluvio Ruiz Alarcón, Diana Negroponte and Ambassador Arturo Sarukhan for a review of the key challenges that lie ahead for Mexico’s energy reforms, now that preliminary constitutional reforms have passed. Questions remain regarding the regulation of the energy industry, the balance between the public and private sector, and implications for Mexican – and more broadly North American – energy security.

Seventy five years after the nationalization of the oil company, Petróleos Mexicanos (PEMEX), the December constitutional reforms opened the energy sector to private investment and will transform PEMEX from a government agency to a productive state enterprise. Though oil and gas in the subsoil will remain in the hands of the Mexican people, licenses and production sharing can be employed from the wellhead onwards. The ability of PEMEX to enter into joint ventures has the potential to speed up the exploration and exploitation of hydrocarbons in the Mexican territory, though such profit sharing or service contracts also pose regulatory and political challenges.

As the Mexican state will no longer be the single operator of energy in Mexico, the state must develop its regulatory capacity and competence to continue to ensure Mexican energy security. PEMEX currently provides over 30 percent of Mexican government revenue, but the state must ensure PEMEX’s budget autonomy going forward and avoid overregulation. This will support PEMEX’s ability to re-invest in its own wells and become competitive with private oil companies, as the law requires it to do.

Moreover, political consensus with regard to the secondary legislation will be critical in supporting the engagement of the private sector. The government must “win the street” and convince public opinion that the new model will not transfer a public monopoly to a new monopoly in the hands of the private sector. An additional challenge will be the ability to institutionalize and enshrine the independence and autonomy of the four new regulatory agencies recently approved to manage the auction of the bids, industrial safety, environmental issues and transportation of gas.

Nevertheless, the energy reforms hold great potential not only within Mexico but also for its ability attract investment and leverage its economic power to build global geopolitical clout. Putting energy at the center of discussions on deepening NAFTA can help ensure that that the reforms are not only a turning point for Mexico but also for the security of North America.

President Pena Nieto’s yearlong effort to reform significant parts of the Mexican state floundered in September 2013 when the government produced a so-called fiscal reform that failed to live up to its name. Excitement generated over reforming labor, education, telecommunications and banking fizzled out. Instead, a degree of disappointment entered into Mexican discourse with accusations that the reforming spirit of this president was no better than his predecessors. However, on December 11 Pena Nieto published his desired constitutional amendments to reform the energy sector. On December 18, he gained the necessary approval from a majority of Mexican states. With remarkable speed, Pena Nieto has recaptured the political levers and demonstrated skill to enact a breathtaking strategic reform. Passage of the Constitutional energy reform permits Pena Nieto to catalyze his reform program and portray a government that can both introduce and implement significant modernization.

What do the constitutional changes on hydrocarbons and electrical energy entail and how significant are they? As anticipated in my article, “Mexico’s Most Critical Challenge: Energy Reform” of November 25, the law allows the Secretary of Energy (SENER) to grant licenses to private institutions, including foreign persons for all downstream activities, i.e. refining, pipelines, petrochemicals, transport and even management of gas stations. (Licenses should be distinguished from concessions in that ownership of the resource – oil and gas – occurs at the well head, not in the subsoil.) However, SENER may not grant licenses or production sharing contracts for the exploration and extraction of oil and gas. Those activities may only be awarded on a contract for profit basis. The Mexican state thus preserves its ownership of the subsoil and its contents, respecting the historical - and much venerated national ownership of the “black gold” and the gas.

Electricity Industry
In the case of electricity generation, the state owned company Confederacion Federal de Electricidad (CFE) may neither grant licenses, nor production/profit sharing contracts for the transmission and distribution of electrical energy. However, all other activities in the electricity industry are open to contracts with private entities. This article will focus on the changes to the hydrocarbons regime, leaving the reforms to this industry for a future article.

Allocated Entitlements to PEMEX

The constitutional changes to Articles 25, 27 and 28, together with 21 “transitory laws” holding constitutional effect, require that SENER, on behalf of the Mexican state manage the nation’s oil and gas reserves and identify the areas for exploration and extraction. Contracts will be awarded by the National Hydrocarbon Commission (CNH) to PEMEX and to private entities through “allocated entitlements.” PEMEX holds priority in the first round, a.k.a. “Round Zero” of entitlements to extract oil and gas from fields on condition that it can extract and operate commercially. However, “Round Zero” contracts will only be issued during a 90 day window following passage of the implementing legislation. Holding the rights to commercialize allocated in this short timeframe, PEMEX then has 3 to 5 years to develop the resource. Significant pressure will exist to deliver results.

During that time, PEMEX may chose to exploit the resource itself, or enter into joint venture with private companies for the development of fields on the basis of a contract for profit. These opportunities maybe of interest to oil service companies as well as U.S. ‘independents’ who produce 54 percent of domestic U.S. oil, 85 percent of domestic U.S. gas and drill 95 percent of domestic U.S. oil and gas wells.[1] PEMEX willingness to enter into joint ventures with U.S. ‘independents’ could produce sophisticated technology and know-how that PEMEX presently lacks and allow it to develop half-exploited fields, known as “bitten apples.” PEMEX may also decide to develop the field itself, but later transfer the “allocated entitlement” into a new contract with private companies. Throughout this process, PEMEX remains a favored contractor, but loses its monopoly position and is subject to Mexican regulators.

Four Types of Contracts
After the 90 day “Round Zero” period, a reconstituted National Hydrocarbon Commission (CNH) can award four different types of contracts to private companies, be they Mexican or international. These are service contracts that currently exist, but are of little interest to private companies, profit sharing, production sharing and licenses. Although considerable space is devoted to discussing the exploration and extraction of oil and gas, perhaps the greatest interest to U.S. companies will lie in the mid and downstream activities, i.e. refining, transportation, pipelines and storage, as well as gas stations.

Working through the CNH, the Secretary of Energy (SENER) will establish the valuation for areas of exploration and extraction, and open them up for public auction. In those areas where PEMEX believes that it can carry out commercial and profitable extraction, PEMEX is given 3 to 5 years to develop those fields. Furthermore, SENER will allow PEMEX to participate in service contracts, production contracts and license agreements for the development of mid and downfield activities, i.e. refining, pipelines and transportation, petrochemicals, marketing and sale of gas stations. PEMEX will no longer have a monopoly in these activities, but compete with private entities to determine which can provide the greatest revenues for the Mexican state.

Regulators and the Mexican Petroleum Fund

To safeguard the revenue generated from the licenses and contracts, a new national trust fund is created, the “Mexican Petroleum Fund for Stabilization and Development.” This fund is modeled on Oljefondet, Norway’s oil fund. It will be created to ensure the long term viability of oil/gas resources both for investment in the oil sector, as well as the social sector of the Mexican state, i.e. pensions and education. The Mexican fund will be placed within the Mexican Central Bank and be responsible for receiving, administering and distributing the income derived from both the licenses and private or production contracts. Furthermore, the reconstituted CNH and a new Energy Regulatory Commission (CRE), as well as regulatory bodies to overseas industrial safety and environmental protection will be created. CNH will play the most important role. It will be responsible for issuing the contracts, publishing the terms of the agreements and ensuring that payments are made to the Mexican Petroleum Fund. PEMEX will no longer receive minimal oversight from regulators. Instead, it will be treated as an independent national oil company, subject to the new regulatory bodies and bound to publish its accounts and operations.

PEMEX to become a for-profit company

Within a period of 2 years from the passage of the law, that is December 2013, PEMEX is required to become a state owned, profitable corporation which revenue is dependent upon its own extraction and the profit contracts that it enters into. Gone are the revenue streams from all energy related activities. PEMEX faces three more challenges: it anticipates that personnel will leave PEMEX lured by the higher salaries of international oil and service companies. We could see skilled geologists and petroleum engineers moving over to the private contractors. Second, PEMEX anticipates that a generation of managers will retire within the next three to five years depleting the national oil company of its leadership team. Third, transparency will make it harder to contract with small Mexican business which supply boots, medical equipment et al. at uncompetitive prices based on sweet heart deals. Finally, PEMEX will have to operate as a for-profit company and, where necessary sell off assets to generate operating funds and pay its pension liabilities. From the privileged position of absorbing all energy related revenues, subject to minimum regulatory oversight and passing a high, but established percentage onto the Federal government, PEMEX could be short of funds and drained of talent.

The consulta nacional (referendum) on energy reform

Who will contract with PEMEX for the exploration and extraction of hydro-carbons? Both ‘majors’ and ‘independents’ may act cautiously, conscious that strong opposition remains in Mexican society to the prospect of private participation demonstrable through the consulta nacional (referendum). The PRD, on the left of the political spectrum plans to use this referendum to block the energy reform. Earlier this year, the PRD succeeded in gaining the signatures of more than 2 percent of those registered to vote so as to force a referendum in conjunction with the mid-term election in 2015. Those in favor of the energy reform must rely on the Supreme Court determining that this reform is of national transcendence thus requiring a majority vote to block the reform in both legislative bodies. The PRD may have obtained sufficient signatures to hold the referendum, but the strong majority of those favoring the reform from both the center-right PAN and the governing PRI party in both the Lower House and the Senate make it unlikely that the PRD will achieve the majority vote in Congress to block the reforms. Despite the anticipated outcome, the referendum process could provoke nervousness and a degree of uncertainty among international investors.

Mexican energy companies

Perhaps the first to take advantage of the reforms will be Mexican business owners who will form the first generation of privately held energy companies to invest in hydrocarbons. Mexican entrepreneurs hold the advantage of deep knowledge of doing business with their government. Meanwhile, the international oil industry will watch to determine the capabilities of these new private Mexican entities. Opportunities for joint ventures will abound.

Oil Service Companies

Second, the structure of the constitutional changes with licenses granted in all mid and downstream operations suggests that oil service companies may demonstrate greater interest than international oil companies in Mexican energy. Although, the majors are famed for their project management and access to capital, the nature of the contracts that will open up, as well as the allocation of licenses in the mid to downstream production streams are better suited to oil service companies. They too may enter into joint venture with Mexican corporations to develop the extensive resources throughout the energy industry. Currently, PEMEX is an investor in the Shell Deer Park Refining Company outside Houston. That joint venture will now be able to consider refining operations in Mexico. This is a win for new investment in Mexico and greater productivity in the oil and gas sectors.

Expectations for economic growth and jobs

The reform represents a paradigm shift for Mexico. Gone is the dominance of PEMEX. There exists the potential to see increased investment in the energy sector and increased production from the current 2.4 million barrels a day (mmpd), to 3 mmpd in 2018 and 3.5 mmpd in 2025. Furthermore, the Mexican government anticipates an additional one percent in GDP growth by 2018 and 2 percent by 2025, the creation of half a million jobs by 2018 and 2.5 million jobs by 2025, as well lower costs of electricity and gasoline.[2] The prospect is exciting both for Mexico and North American energy integration.

However, the details of how the hydrocarbon fields will be valued, the bidding process, the nature of the contracts and the explicit approval of the U.S. Securities and Exchange Commission (SEC) on how international companies may book reserves in their annual accounts is yet to be defined. Given the work that has already been devoted to this reform, we can be confident that the brightest minds in Mexico will seek to resolve these issues. They will examine the work of the U.S. Energy Department in bidding, the role of private investors in the Colombian, ECOPETROL and the Norwegian management of its Oljefondet for long term savings, among others. They will draw upon best practices and then persuade the political elite and the Mexican citizens that this reform producers winners over the long term. That time frame is expected to occur after President Pena Nieto leaves office at the end of 2018, but the reforms should be sufficiently advanced that it will be economically costly to turn them back.

Authors

President Pena Nieto’s yearlong effort to reform significant parts of the Mexican state floundered in September 2013 when the government produced a so-called fiscal reform that failed to live up to its name. Excitement generated over reforming labor, education, telecommunications and banking fizzled out. Instead, a degree of disappointment entered into Mexican discourse with accusations that the reforming spirit of this president was no better than his predecessors. However, on December 11 Pena Nieto published his desired constitutional amendments to reform the energy sector. On December 18, he gained the necessary approval from a majority of Mexican states. With remarkable speed, Pena Nieto has recaptured the political levers and demonstrated skill to enact a breathtaking strategic reform. Passage of the Constitutional energy reform permits Pena Nieto to catalyze his reform program and portray a government that can both introduce and implement significant modernization.

What do the constitutional changes on hydrocarbons and electrical energy entail and how significant are they? As anticipated in my article, “Mexico’s Most Critical Challenge: Energy Reform” of November 25, the law allows the Secretary of Energy (SENER) to grant licenses to private institutions, including foreign persons for all downstream activities, i.e. refining, pipelines, petrochemicals, transport and even management of gas stations. (Licenses should be distinguished from concessions in that ownership of the resource – oil and gas – occurs at the well head, not in the subsoil.) However, SENER may not grant licenses or production sharing contracts for the exploration and extraction of oil and gas. Those activities may only be awarded on a contract for profit basis. The Mexican state thus preserves its ownership of the subsoil and its contents, respecting the historical - and much venerated national ownership of the “black gold” and the gas.

Electricity Industry
In the case of electricity generation, the state owned company Confederacion Federal de Electricidad (CFE) may neither grant licenses, nor production/profit sharing contracts for the transmission and distribution of electrical energy. However, all other activities in the electricity industry are open to contracts with private entities. This article will focus on the changes to the hydrocarbons regime, leaving the reforms to this industry for a future article.

Allocated Entitlements to PEMEX

The constitutional changes to Articles 25, 27 and 28, together with 21 “transitory laws” holding constitutional effect, require that SENER, on behalf of the Mexican state manage the nation’s oil and gas reserves and identify the areas for exploration and extraction. Contracts will be awarded by the National Hydrocarbon Commission (CNH) to PEMEX and to private entities through “allocated entitlements.” PEMEX holds priority in the first round, a.k.a. “Round Zero” of entitlements to extract oil and gas from fields on condition that it can extract and operate commercially. However, “Round Zero” contracts will only be issued during a 90 day window following passage of the implementing legislation. Holding the rights to commercialize allocated in this short timeframe, PEMEX then has 3 to 5 years to develop the resource. Significant pressure will exist to deliver results.

During that time, PEMEX may chose to exploit the resource itself, or enter into joint venture with private companies for the development of fields on the basis of a contract for profit. These opportunities maybe of interest to oil service companies as well as U.S. ‘independents’ who produce 54 percent of domestic U.S. oil, 85 percent of domestic U.S. gas and drill 95 percent of domestic U.S. oil and gas wells.[1] PEMEX willingness to enter into joint ventures with U.S. ‘independents’ could produce sophisticated technology and know-how that PEMEX presently lacks and allow it to develop half-exploited fields, known as “bitten apples.” PEMEX may also decide to develop the field itself, but later transfer the “allocated entitlement” into a new contract with private companies. Throughout this process, PEMEX remains a favored contractor, but loses its monopoly position and is subject to Mexican regulators.

Four Types of Contracts
After the 90 day “Round Zero” period, a reconstituted National Hydrocarbon Commission (CNH) can award four different types of contracts to private companies, be they Mexican or international. These are service contracts that currently exist, but are of little interest to private companies, profit sharing, production sharing and licenses. Although considerable space is devoted to discussing the exploration and extraction of oil and gas, perhaps the greatest interest to U.S. companies will lie in the mid and downstream activities, i.e. refining, transportation, pipelines and storage, as well as gas stations.

Working through the CNH, the Secretary of Energy (SENER) will establish the valuation for areas of exploration and extraction, and open them up for public auction. In those areas where PEMEX believes that it can carry out commercial and profitable extraction, PEMEX is given 3 to 5 years to develop those fields. Furthermore, SENER will allow PEMEX to participate in service contracts, production contracts and license agreements for the development of mid and downfield activities, i.e. refining, pipelines and transportation, petrochemicals, marketing and sale of gas stations. PEMEX will no longer have a monopoly in these activities, but compete with private entities to determine which can provide the greatest revenues for the Mexican state.

Regulators and the Mexican Petroleum Fund

To safeguard the revenue generated from the licenses and contracts, a new national trust fund is created, the “Mexican Petroleum Fund for Stabilization and Development.” This fund is modeled on Oljefondet, Norway’s oil fund. It will be created to ensure the long term viability of oil/gas resources both for investment in the oil sector, as well as the social sector of the Mexican state, i.e. pensions and education. The Mexican fund will be placed within the Mexican Central Bank and be responsible for receiving, administering and distributing the income derived from both the licenses and private or production contracts. Furthermore, the reconstituted CNH and a new Energy Regulatory Commission (CRE), as well as regulatory bodies to overseas industrial safety and environmental protection will be created. CNH will play the most important role. It will be responsible for issuing the contracts, publishing the terms of the agreements and ensuring that payments are made to the Mexican Petroleum Fund. PEMEX will no longer receive minimal oversight from regulators. Instead, it will be treated as an independent national oil company, subject to the new regulatory bodies and bound to publish its accounts and operations.

PEMEX to become a for-profit company

Within a period of 2 years from the passage of the law, that is December 2013, PEMEX is required to become a state owned, profitable corporation which revenue is dependent upon its own extraction and the profit contracts that it enters into. Gone are the revenue streams from all energy related activities. PEMEX faces three more challenges: it anticipates that personnel will leave PEMEX lured by the higher salaries of international oil and service companies. We could see skilled geologists and petroleum engineers moving over to the private contractors. Second, PEMEX anticipates that a generation of managers will retire within the next three to five years depleting the national oil company of its leadership team. Third, transparency will make it harder to contract with small Mexican business which supply boots, medical equipment et al. at uncompetitive prices based on sweet heart deals. Finally, PEMEX will have to operate as a for-profit company and, where necessary sell off assets to generate operating funds and pay its pension liabilities. From the privileged position of absorbing all energy related revenues, subject to minimum regulatory oversight and passing a high, but established percentage onto the Federal government, PEMEX could be short of funds and drained of talent.

The consulta nacional (referendum) on energy reform

Who will contract with PEMEX for the exploration and extraction of hydro-carbons? Both ‘majors’ and ‘independents’ may act cautiously, conscious that strong opposition remains in Mexican society to the prospect of private participation demonstrable through the consulta nacional (referendum). The PRD, on the left of the political spectrum plans to use this referendum to block the energy reform. Earlier this year, the PRD succeeded in gaining the signatures of more than 2 percent of those registered to vote so as to force a referendum in conjunction with the mid-term election in 2015. Those in favor of the energy reform must rely on the Supreme Court determining that this reform is of national transcendence thus requiring a majority vote to block the reform in both legislative bodies. The PRD may have obtained sufficient signatures to hold the referendum, but the strong majority of those favoring the reform from both the center-right PAN and the governing PRI party in both the Lower House and the Senate make it unlikely that the PRD will achieve the majority vote in Congress to block the reforms. Despite the anticipated outcome, the referendum process could provoke nervousness and a degree of uncertainty among international investors.

Mexican energy companies

Perhaps the first to take advantage of the reforms will be Mexican business owners who will form the first generation of privately held energy companies to invest in hydrocarbons. Mexican entrepreneurs hold the advantage of deep knowledge of doing business with their government. Meanwhile, the international oil industry will watch to determine the capabilities of these new private Mexican entities. Opportunities for joint ventures will abound.

Oil Service Companies

Second, the structure of the constitutional changes with licenses granted in all mid and downstream operations suggests that oil service companies may demonstrate greater interest than international oil companies in Mexican energy. Although, the majors are famed for their project management and access to capital, the nature of the contracts that will open up, as well as the allocation of licenses in the mid to downstream production streams are better suited to oil service companies. They too may enter into joint venture with Mexican corporations to develop the extensive resources throughout the energy industry. Currently, PEMEX is an investor in the Shell Deer Park Refining Company outside Houston. That joint venture will now be able to consider refining operations in Mexico. This is a win for new investment in Mexico and greater productivity in the oil and gas sectors.

Expectations for economic growth and jobs

The reform represents a paradigm shift for Mexico. Gone is the dominance of PEMEX. There exists the potential to see increased investment in the energy sector and increased production from the current 2.4 million barrels a day (mmpd), to 3 mmpd in 2018 and 3.5 mmpd in 2025. Furthermore, the Mexican government anticipates an additional one percent in GDP growth by 2018 and 2 percent by 2025, the creation of half a million jobs by 2018 and 2.5 million jobs by 2025, as well lower costs of electricity and gasoline.[2] The prospect is exciting both for Mexico and North American energy integration.

However, the details of how the hydrocarbon fields will be valued, the bidding process, the nature of the contracts and the explicit approval of the U.S. Securities and Exchange Commission (SEC) on how international companies may book reserves in their annual accounts is yet to be defined. Given the work that has already been devoted to this reform, we can be confident that the brightest minds in Mexico will seek to resolve these issues. They will examine the work of the U.S. Energy Department in bidding, the role of private investors in the Colombian, ECOPETROL and the Norwegian management of its Oljefondet for long term savings, among others. They will draw upon best practices and then persuade the political elite and the Mexican citizens that this reform producers winners over the long term. That time frame is expected to occur after President Pena Nieto leaves office at the end of 2018, but the reforms should be sufficiently advanced that it will be economically costly to turn them back.

Energy reform presents a formidable task for Mexico. President Enrique Peña Nieto has successfully introduced major constitutional reforms since taking office on December 1 last year: quality education, banking, anti-monopoly in telecommunications and labor, in which he supported his predecessor’s proposal. Reform of political institutions to allow, among other things, the re-election of officials at all levels, except president, is due to be debated in Congress in the next few weeks. Furthermore, Peña Nieto introduced fiscal changes which failed to gain acceptance as a true reform. They should have raised significant revenue if the most challenging of the reforms was to succeed, namely energy.

Energy Reform Poses a Historical Challenge for Mexico

The Mexican constitution of 1917 decreed that the subsoil and its contents belonged to the Mexican state. This assertion, made during Mexico’s prolonged and violent civil war has retained quasi-religious significance for the Mexican people. The early exploration and production of oil by Royal Dutch Shell, Jersey Standard and Standard Oil of California (now Chevron) resulted in Mexico becoming the world’s second largest oil producer in the 1920s. However, foreign ownership provoked much popular resentment, leading to President Lázaro Cárdenas’s announcement on March 18, 1938 to nationalize all privately held oil fields and wells. He provided adequate compensation to ensure that relations with both the United States and British governments remained stable, and he avoided the withdrawal of other foreign investors from Mexico. In the constitutional reforms of 1938 and 1940 to Articles 27 and 28, Cárdenas balanced the interests of both state and private persons, such that capital, management and productive techniques could be used for the benefit of the Mexican state. This search for equilibrium lies at the heart of President Peña Nieto’s efforts to reform the energy sector.

Lázaro Cárdenas based these constitutional changes on two principles: first, the state’s exclusive dominion over the subsoil together with the right to contract with third parties in exploration and exploitation of hydro-carbons; and second, the state’s ability to allow concessions on other petroleum industrial activities, such as refining, pipelines and distribution of gasoline.[1] More restrictive amendments to Articles 27 and 28, as well as the secondary or implementing legislation, followed in 1960 and 1983. These reserved to the national oil company, Petróleos Mexicanos (PEMEX), the exclusive right to manage all petroleum industrial activities and prohibited contracts with third parties. Private contracting was allowed into the service sector through the reforms of 2008, but the state monopoly continued to control exploration and exploitation of oil and gas, the construction of the refinery in Hidalgo and the maintenance of the pipelines and distribution of gasoline.

Now, opportunities for greater extraction of both oil and gas require significant new investment, shared risks, and new technologies. Without that, Mexico will continue to depend upon importing 49 percent of its gasoline and 33 percent of its diesel. Of the 2.5 million barrels of crude oil produced each day (bpd) in 2012, PEMEX could refine 1.2 million bpd. The remainder was sent to U.S. Gulf Coast refineries. Imports of natural gas have increased from 3 percent in 1997 to 33 percent in 2012, due to the lower price for North American natural gas. Also, Mexico imports 80 percent of the petrochemicals used throughout the country. Without the juridical framework to allow new investment, new technologies and shared risk, Mexico will become a net importer of hydrocarbons. This is the wake up call to traditionalists who recall the nationalistic fervor of 75 years ago.

However, national pride in the ownership of its “black gold” requires an extensive education campaign; and Mexican citizens deserve an honest assessment of their depleted national asset. PEMEX is both an emblem of the nation’s wealth and a behemoth riddled with corruption. Under PEMEX, yields from Cantarell, the principal oil field, have diminished and Mexican oil and gas production has fallen from its apogee in 2005 of 3.425 million bpd to 2.548 million bpd in 2012. Instead of using PEMEX revenues to invest in new exploration, technology and maintenance, these funds are diverted to supporting approximately one third of Mexican government expenditures. Currently PEMEX only reinvests 15 percent of its total portfolio in exploration activities, far below the level of Brazil’s PETROBRAS and its other international competitors. We may conclude that PEMEX fails to act as a for-profit corporation, but accepts the role as a government agency which profits are invested in the state’s social and infrastructure programs, thus relieving Mexican citizens of paying high taxes.

Today, PEMEX is broke with losses of US$3.017 billion in the 3rd quarter of 2013.[2] Moreover, 2013 operations and maintenance costs increased by almost 25 percent compared to 2012.[3] Subsidies to consumers of oil, gas and electricity amounted to US$6.46 billion in the 3rd quarter of 2013, surpassing the $3.76 billion subsidy budgeted for all of 2013.[4] To reduce imports and meet Mexican industrial and transportation needs, PEMEX must produce half a million more bpd by 2018. The case for energy reform is stark and Mexico’s political leaders have put forward distinct proposals.

Proposals from the Right: PAN

The most ambitious plan comes from the center-right party, the PAN. Production sharing contracts would become legal, in return for which participating companies would pay royalties, taxes and licenses. PEMEX would become autonomous from the government and be regulated by a newly formed, National Hydro Carbon Commission (CNH). PAN leaders would break up the public monopoly both on PEMEX and on electricity generation and distribution held by the state power company, Comisión Federal de Electricidad (CFE). The PAN bill would reduce PEMEX outstanding debt through the issuance of new debt known as Citizen Bonds, as well as hybrid securities to be sold to private investors. Finally, the PAN bill would eliminate the five labor union seats on the PEMEX Board of Directors.

Proposals from the Left: PRD

There is no single proposal from politicians within the PRD. Instead, several factions hold distinct policies. Cuauhtémoc Cárdenas, the son of President Lázaro Cárdenas has become the standard bearer for the PRD in the absence of specific proposals from the more vocal Left. Cárdenas stands against private investment in PEMEX. Instead, he would modify the tax system so as to increase PEMEX resources and its capacity to refine. He seeks to introduce transparency into the operations of PEMEX and root out corruption, both of which have affected the capability of the “paraestatal” to compete with other national oil companies. Cuauhtémoc Cárdenas is the most prominent and respected politician opposing the current energy reform. In this, he has aligned himself with the former mayor of Mexico City and contender for the PRD leadership in the presidential race for 2018, Marcelo Ebrard.

The most radical opposition comes from Andrés Manuel the presidential candidate from the PRD who lost in 2006 to PAN’s Candidate Felipe Calderón. He and his newly formed political movement, MORENA have rejected opening the energy sector to private investment in whatever form it might take. López Obrador would reclaim the support of voters, in their millions, through a nation-wide campaign to reject the current energy reform. To carry this out, he calls for a consulta popular (national consultation) which requires, under Article 35 (VIII) of the Mexican constitution, that he gain signatures from at least 2 percent of those registered in the electoral list; currently estimated to equal 1,700,000 signatures. Furthermore, enactment of any changes, deemed to be of national transcendency, requires a majority vote in favor in both legislative bodies. López Obrador, may obtain sufficient signatures, but the strong majority of PRI and PAN members in both the Lower House and the Senate make it extremely unlikely that he will achieve the majority vote in congress.

President Peña Nieto as Broker

President Peña Nieto leads a coalition of diverse opinions within the governing PRI party. Some PRI members welcome production sharing contracts, as proposed by the center-right PAN. A few would even contemplate the format favored by the international oil companies (OICs), namely concessions, despite the fact that Peña Nieto has rejected this method. (Concessions grant some ownership rights in the resource and allow oil companies to book reserves; a critical accounting feature for international oil companies.) All the while, the more traditional PRI supporters are reluctant to see private investment in PEMEX. For decades the old timers within the PRI have rejected private investment in PEMEX, holding onto sovereign ownership of the petroleum reserves. Their willingness to change — be it grudgingly — reflects the political influence of a new generation of PRI leaders who won back the presidency after 12 years in the wilderness. However, with pressure from the Left which had taken to the streets of Mexico City in support of the education reform, Peña Nieto decided to support the more cautious “profit sharing” contracts in the exploration and exploitation of oil and gas fields, while allow concessions in the downstream industrial activities, such as refining, development and management of pipelines and distribution. In doing so, Peña Nieto recalled the principles enunciated by President Lázaro Cárdenas, namely balance the interest of the state with the need to utilize the capital, shared risk and technology of the private sector.

Constitutional Language for Energy Sector Reforms

On August 12, Peña Nieto announced the proposed constitutional reforms of the energy sector. The principal purpose of the reforms is to eliminate restrictions and introduce as much flexibility as possible in designing juridical methods for engaging the private sector through contracts in exploration and production of gas and oil, including future sources of shale gas. The proposed Constitutional amendments are specific on one critical issue: the state will grant no concessions in the exploration and exploitation of Mexico’s hydro carbon resources. However, no such prohibition exists for the related petroleum industrial activities. The Federal government is to determine the management of the value chain in hydrocarbons — otherwise known as down-stream industrial activities — through its secondary or implementing legislation. This makes the drafting of these laws critically important. It is worth noting that the Federal government, not PEMEX is given this responsibility, which in reality grants the Ministry of Finance an important role in drafting the legislation.

How Can Mexico Successfully Reform Its Energy Sector?

The secondary legislation must set out the shape of the contracts offered to private parties, most notably international oil companies and service companies. It is expected to outline a comprehensive plan that will identify the role of PEMEX, as well as the Ministry of Finance which collects the revenue on behalf of the Mexican state. Secondary legislation will need to establish the mechanisms for valuing the cost of each oil field, whether an old on-shore well, or a projected off-shore deep water bloc. It will need to set out the procedures for establishing operating costs, recuperation costs, and the percentages due to PEMEX and due to the Mexican state. In short, the monopoly will be asked to accept the real cost of oil and gas production through international market evaluation of its current and future assets. These tasks are not easy and require time. Former Director General of PEMEX Adrián Lajous calculates that ten years is needed before PEMEX begins to see the benefit of these reforms.

Whether the institution, PEMEX is restructured to create anefficient and effective oil and gas company remains uncertain. The results of a recent survey, commissioned by the Chamber of Deputies, found that 75 percent of those polled considered that the management of PEMEX was bad, or fair.[5] Only 17 percent considered it good. Furthermore, 88 percent of those polled thought that “very much” or “a certain amount” of corruption existed within PEMEX. Consequently, current popular would support the reform of PEMEX. However, the union of PEMEX workers, representing 101,000 workers out of a total of 150,000 workers, is a powerful institution which will resist changes that reduce its role. Any reform to PEMEX must take into account both the union and its pension fund so as to minimize their capacity to block the reforms.

The principal challenge that lies ahead is the right balance between guarding the underlying resource for the benefit of Mexican citizens and drafting legislation that will attract private investors to join with PEMEX in undertaking exploration and production in deep waters, as well as extractive techniques to reuse old wells and begin to exploit extensive reserves of shale gas near the Texan border. In order to gain support for this most important project, Peña Nieto has to launch a concentrated effort to educate Mexican citizens on the need to allow private investment in the energy sector. To date, the government has acted defensively, rejecting the call for greater information and debate. That has to change if citizens are to understand why the President seeks to reform the energy sector.

Meantime, the PRD has dug in to resist private investment in PEMEX. The struggle will be fierce and national. This is a battle that U.S. politicians and oil executives should stay out of because the prospect of renewed North American participation in the oil sector is an anathema to Mexican voters and their political leaders. We must hope for political debate based on the reality of Mexico’s diminishing hydrocarbon resources and its capacity to finance new exploitation. No one wishes this battle to turn violent and disrupt ordinary lives in Mexican towns and along the pipelines. A healthy, political and national debate should occur over several weeks, if not months. In the meantime, Mexicans have come to accept the reality of a global and competitive world. Part of that reality is laying the legal groundwork for private investment, risk and talent in Mexico’s energy sector.

[1] For an analysis of President Lázaro Cárdenas’s constitutional amendments and their rationale see President Peña Nieto’s “Initiative to Reform the Constitution,” August 12, 2013.

Authors

Energy reform presents a formidable task for Mexico. President Enrique Peña Nieto has successfully introduced major constitutional reforms since taking office on December 1 last year: quality education, banking, anti-monopoly in telecommunications and labor, in which he supported his predecessor’s proposal. Reform of political institutions to allow, among other things, the re-election of officials at all levels, except president, is due to be debated in Congress in the next few weeks. Furthermore, Peña Nieto introduced fiscal changes which failed to gain acceptance as a true reform. They should have raised significant revenue if the most challenging of the reforms was to succeed, namely energy.

Energy Reform Poses a Historical Challenge for Mexico

The Mexican constitution of 1917 decreed that the subsoil and its contents belonged to the Mexican state. This assertion, made during Mexico’s prolonged and violent civil war has retained quasi-religious significance for the Mexican people. The early exploration and production of oil by Royal Dutch Shell, Jersey Standard and Standard Oil of California (now Chevron) resulted in Mexico becoming the world’s second largest oil producer in the 1920s. However, foreign ownership provoked much popular resentment, leading to President Lázaro Cárdenas’s announcement on March 18, 1938 to nationalize all privately held oil fields and wells. He provided adequate compensation to ensure that relations with both the United States and British governments remained stable, and he avoided the withdrawal of other foreign investors from Mexico. In the constitutional reforms of 1938 and 1940 to Articles 27 and 28, Cárdenas balanced the interests of both state and private persons, such that capital, management and productive techniques could be used for the benefit of the Mexican state. This search for equilibrium lies at the heart of President Peña Nieto’s efforts to reform the energy sector.

Lázaro Cárdenas based these constitutional changes on two principles: first, the state’s exclusive dominion over the subsoil together with the right to contract with third parties in exploration and exploitation of hydro-carbons; and second, the state’s ability to allow concessions on other petroleum industrial activities, such as refining, pipelines and distribution of gasoline.[1] More restrictive amendments to Articles 27 and 28, as well as the secondary or implementing legislation, followed in 1960 and 1983. These reserved to the national oil company, Petróleos Mexicanos (PEMEX), the exclusive right to manage all petroleum industrial activities and prohibited contracts with third parties. Private contracting was allowed into the service sector through the reforms of 2008, but the state monopoly continued to control exploration and exploitation of oil and gas, the construction of the refinery in Hidalgo and the maintenance of the pipelines and distribution of gasoline.

Now, opportunities for greater extraction of both oil and gas require significant new investment, shared risks, and new technologies. Without that, Mexico will continue to depend upon importing 49 percent of its gasoline and 33 percent of its diesel. Of the 2.5 million barrels of crude oil produced each day (bpd) in 2012, PEMEX could refine 1.2 million bpd. The remainder was sent to U.S. Gulf Coast refineries. Imports of natural gas have increased from 3 percent in 1997 to 33 percent in 2012, due to the lower price for North American natural gas. Also, Mexico imports 80 percent of the petrochemicals used throughout the country. Without the juridical framework to allow new investment, new technologies and shared risk, Mexico will become a net importer of hydrocarbons. This is the wake up call to traditionalists who recall the nationalistic fervor of 75 years ago.

However, national pride in the ownership of its “black gold” requires an extensive education campaign; and Mexican citizens deserve an honest assessment of their depleted national asset. PEMEX is both an emblem of the nation’s wealth and a behemoth riddled with corruption. Under PEMEX, yields from Cantarell, the principal oil field, have diminished and Mexican oil and gas production has fallen from its apogee in 2005 of 3.425 million bpd to 2.548 million bpd in 2012. Instead of using PEMEX revenues to invest in new exploration, technology and maintenance, these funds are diverted to supporting approximately one third of Mexican government expenditures. Currently PEMEX only reinvests 15 percent of its total portfolio in exploration activities, far below the level of Brazil’s PETROBRAS and its other international competitors. We may conclude that PEMEX fails to act as a for-profit corporation, but accepts the role as a government agency which profits are invested in the state’s social and infrastructure programs, thus relieving Mexican citizens of paying high taxes.

Today, PEMEX is broke with losses of US$3.017 billion in the 3rd quarter of 2013.[2] Moreover, 2013 operations and maintenance costs increased by almost 25 percent compared to 2012.[3] Subsidies to consumers of oil, gas and electricity amounted to US$6.46 billion in the 3rd quarter of 2013, surpassing the $3.76 billion subsidy budgeted for all of 2013.[4] To reduce imports and meet Mexican industrial and transportation needs, PEMEX must produce half a million more bpd by 2018. The case for energy reform is stark and Mexico’s political leaders have put forward distinct proposals.

Proposals from the Right: PAN

The most ambitious plan comes from the center-right party, the PAN. Production sharing contracts would become legal, in return for which participating companies would pay royalties, taxes and licenses. PEMEX would become autonomous from the government and be regulated by a newly formed, National Hydro Carbon Commission (CNH). PAN leaders would break up the public monopoly both on PEMEX and on electricity generation and distribution held by the state power company, Comisión Federal de Electricidad (CFE). The PAN bill would reduce PEMEX outstanding debt through the issuance of new debt known as Citizen Bonds, as well as hybrid securities to be sold to private investors. Finally, the PAN bill would eliminate the five labor union seats on the PEMEX Board of Directors.

Proposals from the Left: PRD

There is no single proposal from politicians within the PRD. Instead, several factions hold distinct policies. Cuauhtémoc Cárdenas, the son of President Lázaro Cárdenas has become the standard bearer for the PRD in the absence of specific proposals from the more vocal Left. Cárdenas stands against private investment in PEMEX. Instead, he would modify the tax system so as to increase PEMEX resources and its capacity to refine. He seeks to introduce transparency into the operations of PEMEX and root out corruption, both of which have affected the capability of the “paraestatal” to compete with other national oil companies. Cuauhtémoc Cárdenas is the most prominent and respected politician opposing the current energy reform. In this, he has aligned himself with the former mayor of Mexico City and contender for the PRD leadership in the presidential race for 2018, Marcelo Ebrard.

The most radical opposition comes from Andrés Manuel the presidential candidate from the PRD who lost in 2006 to PAN’s Candidate Felipe Calderón. He and his newly formed political movement, MORENA have rejected opening the energy sector to private investment in whatever form it might take. López Obrador would reclaim the support of voters, in their millions, through a nation-wide campaign to reject the current energy reform. To carry this out, he calls for a consulta popular (national consultation) which requires, under Article 35 (VIII) of the Mexican constitution, that he gain signatures from at least 2 percent of those registered in the electoral list; currently estimated to equal 1,700,000 signatures. Furthermore, enactment of any changes, deemed to be of national transcendency, requires a majority vote in favor in both legislative bodies. López Obrador, may obtain sufficient signatures, but the strong majority of PRI and PAN members in both the Lower House and the Senate make it extremely unlikely that he will achieve the majority vote in congress.

President Peña Nieto as Broker

President Peña Nieto leads a coalition of diverse opinions within the governing PRI party. Some PRI members welcome production sharing contracts, as proposed by the center-right PAN. A few would even contemplate the format favored by the international oil companies (OICs), namely concessions, despite the fact that Peña Nieto has rejected this method. (Concessions grant some ownership rights in the resource and allow oil companies to book reserves; a critical accounting feature for international oil companies.) All the while, the more traditional PRI supporters are reluctant to see private investment in PEMEX. For decades the old timers within the PRI have rejected private investment in PEMEX, holding onto sovereign ownership of the petroleum reserves. Their willingness to change — be it grudgingly — reflects the political influence of a new generation of PRI leaders who won back the presidency after 12 years in the wilderness. However, with pressure from the Left which had taken to the streets of Mexico City in support of the education reform, Peña Nieto decided to support the more cautious “profit sharing” contracts in the exploration and exploitation of oil and gas fields, while allow concessions in the downstream industrial activities, such as refining, development and management of pipelines and distribution. In doing so, Peña Nieto recalled the principles enunciated by President Lázaro Cárdenas, namely balance the interest of the state with the need to utilize the capital, shared risk and technology of the private sector.

Constitutional Language for Energy Sector Reforms

On August 12, Peña Nieto announced the proposed constitutional reforms of the energy sector. The principal purpose of the reforms is to eliminate restrictions and introduce as much flexibility as possible in designing juridical methods for engaging the private sector through contracts in exploration and production of gas and oil, including future sources of shale gas. The proposed Constitutional amendments are specific on one critical issue: the state will grant no concessions in the exploration and exploitation of Mexico’s hydro carbon resources. However, no such prohibition exists for the related petroleum industrial activities. The Federal government is to determine the management of the value chain in hydrocarbons — otherwise known as down-stream industrial activities — through its secondary or implementing legislation. This makes the drafting of these laws critically important. It is worth noting that the Federal government, not PEMEX is given this responsibility, which in reality grants the Ministry of Finance an important role in drafting the legislation.

How Can Mexico Successfully Reform Its Energy Sector?

The secondary legislation must set out the shape of the contracts offered to private parties, most notably international oil companies and service companies. It is expected to outline a comprehensive plan that will identify the role of PEMEX, as well as the Ministry of Finance which collects the revenue on behalf of the Mexican state. Secondary legislation will need to establish the mechanisms for valuing the cost of each oil field, whether an old on-shore well, or a projected off-shore deep water bloc. It will need to set out the procedures for establishing operating costs, recuperation costs, and the percentages due to PEMEX and due to the Mexican state. In short, the monopoly will be asked to accept the real cost of oil and gas production through international market evaluation of its current and future assets. These tasks are not easy and require time. Former Director General of PEMEX Adrián Lajous calculates that ten years is needed before PEMEX begins to see the benefit of these reforms.

Whether the institution, PEMEX is restructured to create anefficient and effective oil and gas company remains uncertain. The results of a recent survey, commissioned by the Chamber of Deputies, found that 75 percent of those polled considered that the management of PEMEX was bad, or fair.[5] Only 17 percent considered it good. Furthermore, 88 percent of those polled thought that “very much” or “a certain amount” of corruption existed within PEMEX. Consequently, current popular would support the reform of PEMEX. However, the union of PEMEX workers, representing 101,000 workers out of a total of 150,000 workers, is a powerful institution which will resist changes that reduce its role. Any reform to PEMEX must take into account both the union and its pension fund so as to minimize their capacity to block the reforms.

The principal challenge that lies ahead is the right balance between guarding the underlying resource for the benefit of Mexican citizens and drafting legislation that will attract private investors to join with PEMEX in undertaking exploration and production in deep waters, as well as extractive techniques to reuse old wells and begin to exploit extensive reserves of shale gas near the Texan border. In order to gain support for this most important project, Peña Nieto has to launch a concentrated effort to educate Mexican citizens on the need to allow private investment in the energy sector. To date, the government has acted defensively, rejecting the call for greater information and debate. That has to change if citizens are to understand why the President seeks to reform the energy sector.

Meantime, the PRD has dug in to resist private investment in PEMEX. The struggle will be fierce and national. This is a battle that U.S. politicians and oil executives should stay out of because the prospect of renewed North American participation in the oil sector is an anathema to Mexican voters and their political leaders. We must hope for political debate based on the reality of Mexico’s diminishing hydrocarbon resources and its capacity to finance new exploitation. No one wishes this battle to turn violent and disrupt ordinary lives in Mexican towns and along the pipelines. A healthy, political and national debate should occur over several weeks, if not months. In the meantime, Mexicans have come to accept the reality of a global and competitive world. Part of that reality is laying the legal groundwork for private investment, risk and talent in Mexico’s energy sector.

[1] For an analysis of President Lázaro Cárdenas’s constitutional amendments and their rationale see President Peña Nieto’s “Initiative to Reform the Constitution,” August 12, 2013.

The Secretary of State was the target of a public drubbing in Brazil. Kerry had been warned beforehand that Brazilian criticism of the NSA program would be public and fierce. There is no equivalent national program to collect information in Brazil, and for a nation which still recalls authoritarian ways of the military rule, intelligence gathering holds strong negative connotations. Two days after Secretary Kerry’s visit, President Rousseff’s government announced that it is considering measures to make it a crime for people to read other’s email messages without their consent. The sensitivity of intelligence gathering remained an issue throughout Kerry’s visit, but other important subjects were discussed in the context of President Rousseff’s forthcoming state visit to the United States on October 23. What might we expect in these bilateral discussions?

The U.S. and Brazil have a growing trade and investment ties. According to the U.S. Census Bureau, from a negative trade balance of $1.4 billion in 2007, U.S. exports to Brazil have grown from $24.2 to $43.8 billion in 2012. Imports have also grown, but the balance is now in the U.S. favor at $11.7 billion. Much of this trade is in complementary goods making two-way trade positive for both countries. However, according to the Financial Times, Brazil’s trade with the Europe Union (EU) rose by 195% between 2000 and 2010 to $98 billion, and Foreign Minister Antonio Patriota talks of a ‘fast tracked’ free trade agreement with the EU. Brazil sees greater opportunity for growth with the European market. Meantime, there is no talk of a trade agreement with the United States.

However, opportunities exist within the bilateral Strategic Energy Dialogue to deepen cooperation on biofuels, renewable energy and energy efficiency, the smart grid, as well as an initiative for oil and gas development and nuclear power. Although the U.S. Department of Energy is responsible for this dialogue, Secretary Kerry expressed his hope that in September’s bilateral meeting, both the U.S. and Brazilian private sectors might find a place at the table to discuss the development of joint projects. Scope exists for the electrical utility companies in both countries to work together in developing energy efficiency techniques and electrical transmission.

In Kerry’s August visit, discussions also took place on Brazilian exports of sugarcane-based ethanol to the United States. Brazilian ethanol is competitive in the U.S. market due to a complex regulatory regime that has encouraged the production of sugarcane-based ethanol to meet increasing levels of ethanol in U.S. gasoline.[1] To meet the rising quantity of ethanol that U.S. law requires to be blended with gasoline sold in the United States, Brazilian sugarcane producers have invested significantly in the production and processing of sugarcane ethanol for export to the United States. Today, fuel companies are required to use 500 million gallons of ‘advanced’ biofuels to blend into U.S. gasoline. This quantity is expected to triple to 1.75 billion gallons of sugarcane-based ethanol and Brazil is the only ethanol industry with the capacity to meet these ‘advanced’ levels. Clearly, the potential market for Brazilian ethanol is significant, but the current pricing structure in Brazil provides little incentive for Brazilian farmers to add production. Consequently, there is inadequate supply to meet this huge export potential. Discussions on how to relieve ethanol producers of the restraints imposed by both U.S. and Brazilian regulators could ease the way for expanded use of Brazilian ethanol in U.S. gasoline production.

A further issue on the bilateral agenda is Foreign Minister Patriota’s desire to extend the U.S. Visa Waiver Program to Brazil. This is limited by U.S. statutory requirements which include the sharing of information on the criminal and alleged terrorist background of travelers to the United States. Both the gathering of this information and its sharing with a foreign government remain a most sensitive issue for Brazilians. It is therefore doubtful that progress can be made in the near term on the Visa Waiver program, particularly given the ruckus over Edward Snowden’s revelations on metadata collection.

Brazilian citizens may not gain the Visa Waiver Program, but the expansion of U.S. consulates in Brazil and the reduction in time to obtain a U.S. visitor’s visa from over 120 days in 2011 to 2 days in 2013 should result in an expansion of Brazilian tourists and business visitors to the United States. Added to this, Brazilian citizens can now apply for Global Entry privileges at U.S. consulates in Brazil, where the interview and collection of biometric data will be offered. This should facilitate Brazilian entry into the United States for those tourists and business visitors willing to share personal information with the U.S. government, and is likely to be welcomed by Brazilian frequent travelers.

Finally, U.S. schools offering science, technology, engineering and math (STEM) programs welcomed 9,600 Brazilian students in 2012 under Brazil’s ‘Science without Borders’ program. These numbers pale in comparison with approximately 200,000 Chinese students and over 103,000 Indian students registered in broad fields of study in the United States. There should be room to expand STEM students from Brazil. Likewise it is important that U.S. students take advantage of the education and training offered at Brazilian institutions under the U.S. government and private sector initiative, known as ‘100,000 Strong in the Americas.’ However, to attract U.S. students interested in Brazil, U.S. colleges need to offer Portuguese language training. The opportunities for study in Brazilian environmental and energy fields are good, and with private sector participation the number of students will increase.

In conclusion, bilateral relations depend upon multiple and distinct areas of cooperation which are designed to continue over the long term and allow both nations to weather disagreements, such as the NSA program. This proposition will be tested in October when President Rousseff keeps to her schedule and enjoys the state visit offered only to special visitors.

[1] Mandated by the 2007 Renewable Fuel Standard legislation, the Environmental Protection Agency (EPA) requires that a Renewable Identification Number (RIN) be issued for each gallon of imported, or domestically produced ethanol. The RIN is later tied to a tradable credit which value is related to the quantity of ethanol needed in U.S. gasoline; a process managed by the EPA. As the EPA raises the required quantity of ethanol, the value of the tradable credit rises also. Likewise, when the quantity is reduced the value of the credit falls. For example, the EPA postponed the date for raising the required 2013 ethanol content from February to August 2013 with the result that the tradable credit fell to 89 cents per gallon from an earlier $1.43 per gallon in July.

Authors

The Secretary of State was the target of a public drubbing in Brazil. Kerry had been warned beforehand that Brazilian criticism of the NSA program would be public and fierce. There is no equivalent national program to collect information in Brazil, and for a nation which still recalls authoritarian ways of the military rule, intelligence gathering holds strong negative connotations. Two days after Secretary Kerry’s visit, President Rousseff’s government announced that it is considering measures to make it a crime for people to read other’s email messages without their consent. The sensitivity of intelligence gathering remained an issue throughout Kerry’s visit, but other important subjects were discussed in the context of President Rousseff’s forthcoming state visit to the United States on October 23. What might we expect in these bilateral discussions?

The U.S. and Brazil have a growing trade and investment ties. According to the U.S. Census Bureau, from a negative trade balance of $1.4 billion in 2007, U.S. exports to Brazil have grown from $24.2 to $43.8 billion in 2012. Imports have also grown, but the balance is now in the U.S. favor at $11.7 billion. Much of this trade is in complementary goods making two-way trade positive for both countries. However, according to the Financial Times, Brazil’s trade with the Europe Union (EU) rose by 195% between 2000 and 2010 to $98 billion, and Foreign Minister Antonio Patriota talks of a ‘fast tracked’ free trade agreement with the EU. Brazil sees greater opportunity for growth with the European market. Meantime, there is no talk of a trade agreement with the United States.

However, opportunities exist within the bilateral Strategic Energy Dialogue to deepen cooperation on biofuels, renewable energy and energy efficiency, the smart grid, as well as an initiative for oil and gas development and nuclear power. Although the U.S. Department of Energy is responsible for this dialogue, Secretary Kerry expressed his hope that in September’s bilateral meeting, both the U.S. and Brazilian private sectors might find a place at the table to discuss the development of joint projects. Scope exists for the electrical utility companies in both countries to work together in developing energy efficiency techniques and electrical transmission.

In Kerry’s August visit, discussions also took place on Brazilian exports of sugarcane-based ethanol to the United States. Brazilian ethanol is competitive in the U.S. market due to a complex regulatory regime that has encouraged the production of sugarcane-based ethanol to meet increasing levels of ethanol in U.S. gasoline.[1] To meet the rising quantity of ethanol that U.S. law requires to be blended with gasoline sold in the United States, Brazilian sugarcane producers have invested significantly in the production and processing of sugarcane ethanol for export to the United States. Today, fuel companies are required to use 500 million gallons of ‘advanced’ biofuels to blend into U.S. gasoline. This quantity is expected to triple to 1.75 billion gallons of sugarcane-based ethanol and Brazil is the only ethanol industry with the capacity to meet these ‘advanced’ levels. Clearly, the potential market for Brazilian ethanol is significant, but the current pricing structure in Brazil provides little incentive for Brazilian farmers to add production. Consequently, there is inadequate supply to meet this huge export potential. Discussions on how to relieve ethanol producers of the restraints imposed by both U.S. and Brazilian regulators could ease the way for expanded use of Brazilian ethanol in U.S. gasoline production.

A further issue on the bilateral agenda is Foreign Minister Patriota’s desire to extend the U.S. Visa Waiver Program to Brazil. This is limited by U.S. statutory requirements which include the sharing of information on the criminal and alleged terrorist background of travelers to the United States. Both the gathering of this information and its sharing with a foreign government remain a most sensitive issue for Brazilians. It is therefore doubtful that progress can be made in the near term on the Visa Waiver program, particularly given the ruckus over Edward Snowden’s revelations on metadata collection.

Brazilian citizens may not gain the Visa Waiver Program, but the expansion of U.S. consulates in Brazil and the reduction in time to obtain a U.S. visitor’s visa from over 120 days in 2011 to 2 days in 2013 should result in an expansion of Brazilian tourists and business visitors to the United States. Added to this, Brazilian citizens can now apply for Global Entry privileges at U.S. consulates in Brazil, where the interview and collection of biometric data will be offered. This should facilitate Brazilian entry into the United States for those tourists and business visitors willing to share personal information with the U.S. government, and is likely to be welcomed by Brazilian frequent travelers.

Finally, U.S. schools offering science, technology, engineering and math (STEM) programs welcomed 9,600 Brazilian students in 2012 under Brazil’s ‘Science without Borders’ program. These numbers pale in comparison with approximately 200,000 Chinese students and over 103,000 Indian students registered in broad fields of study in the United States. There should be room to expand STEM students from Brazil. Likewise it is important that U.S. students take advantage of the education and training offered at Brazilian institutions under the U.S. government and private sector initiative, known as ‘100,000 Strong in the Americas.’ However, to attract U.S. students interested in Brazil, U.S. colleges need to offer Portuguese language training. The opportunities for study in Brazilian environmental and energy fields are good, and with private sector participation the number of students will increase.

In conclusion, bilateral relations depend upon multiple and distinct areas of cooperation which are designed to continue over the long term and allow both nations to weather disagreements, such as the NSA program. This proposition will be tested in October when President Rousseff keeps to her schedule and enjoys the state visit offered only to special visitors.

[1] Mandated by the 2007 Renewable Fuel Standard legislation, the Environmental Protection Agency (EPA) requires that a Renewable Identification Number (RIN) be issued for each gallon of imported, or domestically produced ethanol. The RIN is later tied to a tradable credit which value is related to the quantity of ethanol needed in U.S. gasoline; a process managed by the EPA. As the EPA raises the required quantity of ethanol, the value of the tradable credit rises also. Likewise, when the quantity is reduced the value of the credit falls. For example, the EPA postponed the date for raising the required 2013 ethanol content from February to August 2013 with the result that the tradable credit fell to 89 cents per gallon from an earlier $1.43 per gallon in July.

Press reports of Secretary of State Kerry’s description of the Western Hemisphere as “our backyard” overlooked the next words, “[our] neighborhood … I think there are relationships we could improve.” [1] The focus on “our backyard” caused President Evo Morales to announce on May 1, 2013 that he was expelling the USAID mission from Bolivia because, among other accusations, it reminded hemispheric leaders of U.S. relations toward the hemisphere during the Cold War.

Now in the 21st century, we should focus on Kerry’s use of the word “neighborhood” and his efforts as Secretary of State to improve relations. On August 11, he flew to Colombia and from there Kerry flies on to Brazil. It should not be viewed as John Kerry’s first foray into the hemisphere: He has focused on developments in the Western Hemisphere since 1989, when six Jesuit priests were murdered by U.S.-trained government troops in El Salvador. Kerry has a long history of concern for human rights, as well as trade with the hemisphere. This visit confirms his commitment to improve relations, but what tools does he have to make those improvements?

In Colombia, Kerry will focus on the improved security situation and the ongoing peace talks with the FARC. After years in which he concentrated on counter-narcotics and counter-insurgency and their implications for human rights, Kerry can now discuss “’democratic security’ for all Colombians.”[2] He supports the peace talks and considers that they “deserve support.” [3] Kerry is now a fan of Colombia and of President Juan Manuel Santos, who is “doing an amazing job.”[4] Kerry supported the Free Trade Agreement with Colombia which, according to the Department of Commerce, U.S. Census Bureau has resulted in a near doubling of U.S. exports to Colombia from $8.5 billion in 2007 to $16.4 billion in 2012, and more than double increase in the imports from Colombia from $9.4 billion in 2007 to $24.6 billion in 2012. Many of these imports are parts which are later included in U.S. exports of manufactured goods. In short, the last five years have demonstrated the positive impact of free trade and encouraged the development of alternative products for Colombian farmers. Cocaine is no longer the most contentious commodity in U.S.-Colombia trade flows.

In Brazil, Kerry is expected to focus on developing the Strategic Energy Dialogue and strengthening student exchanges. Brazil currently sends over 9,000 students to study in the U.S. under the government’s ‘Science Without Borders’ program. President Dilma Rousseff would like to send 20,000 students to the U.S. alone to study science, technology, engineering and mathematics. For its part, the U.S. seeks to send 100,000 U.S. students to study in the Western Hemisphere. Another topic is Brazil’s desire to be included within the Visa Waiver Program, which facilitates the movement of tourists and business visitors with most western European nations. Foreign Minister Antonio Patriota considers that Brazil has earned the right to be included in that program. On the U.S. side, concern over the completion of the stadiums, transportation and residential quarters for the forthcoming 2014 World Cup and the 2016 Summer Olympics is related to the willingness of Brazilian citizens to keep relative peace during these important gatherings. This requires that the federal government demonstrate the ability to deliver improved health care and education for its citizens while, at the same time, investing in the massive infrastructure for the games.

The scope of the NSA collection of metadata and Snowden’s declaration that the agency collects information from U.S. allies is a cause of considerable concern in both countries. Once again, it harks back to the hegemonic power and U.S. extensive influence in the days of the Cold War. Kerry will be asked to explain the program, as well as President Obama’s willingness to discuss the broad privacy implications in the warehousing of the metadata. For both U.S. and allied audiences in the hemisphere, citizens are asking to know who listens to whom. Greater comfort on the parameters of the NSA program is needed.

However, the purpose of Kerry’s visit is not purely to answer questions surrounding the NSA. Vice President Biden began that conversation when he called both President Santos of Colombia and President Dilma Rousseff in June. Rather, it is to emphasize the importance that the administration attaches to strong relations with the hemisphere. President Obama visited Mexico and Central America in May, Vice President Biden visited South America and Trinidad and Tobago in June, and Secretary of Agriculture Tom Vilsack visited Brazil in July. A pattern of commitments by senior U.S. officials has developed. Furthermore, Obama will give Dilma Rousseff a State Visit on October 23, enabling Kerry to discuss preparations for that visit. These are small pieces of bilateral tradecraft with which to weave a wholesome cloth.

The challenge is to avoid this visit from being dominated by the NSA revelations. Kerry carries neither a new strategic initiative nor a new partnership. He holds few, if any deliverables. Therefore, his personal diplomacy must persuade two important hemispheric allies that U.S. is a dependable partner. In the midst of convulsions in the Middle East and the early days of Palestinian talks, Kerry created time to visit the neighborhood where the U.S. is working hard to improve its relationships.

[2] Senator John Kerry joined 23 U.S. Senators in a letter to Colombia President Alvaro Uribe, July 26, 2004.

[3] Senator John Kerry statement upon the announcement of peace talks between the Colombian government and the FARC, September 4, 2012; http://www.foreign.senate.gov/press/chair/release/kerry-statement-on-colombian-peace-negotiations-with-farc.

Authors

Press reports of Secretary of State Kerry’s description of the Western Hemisphere as “our backyard” overlooked the next words, “[our] neighborhood … I think there are relationships we could improve.” [1] The focus on “our backyard” caused President Evo Morales to announce on May 1, 2013 that he was expelling the USAID mission from Bolivia because, among other accusations, it reminded hemispheric leaders of U.S. relations toward the hemisphere during the Cold War.

Now in the 21st century, we should focus on Kerry’s use of the word “neighborhood” and his efforts as Secretary of State to improve relations. On August 11, he flew to Colombia and from there Kerry flies on to Brazil. It should not be viewed as John Kerry’s first foray into the hemisphere: He has focused on developments in the Western Hemisphere since 1989, when six Jesuit priests were murdered by U.S.-trained government troops in El Salvador. Kerry has a long history of concern for human rights, as well as trade with the hemisphere. This visit confirms his commitment to improve relations, but what tools does he have to make those improvements?

In Colombia, Kerry will focus on the improved security situation and the ongoing peace talks with the FARC. After years in which he concentrated on counter-narcotics and counter-insurgency and their implications for human rights, Kerry can now discuss “’democratic security’ for all Colombians.”[2] He supports the peace talks and considers that they “deserve support.” [3] Kerry is now a fan of Colombia and of President Juan Manuel Santos, who is “doing an amazing job.”[4] Kerry supported the Free Trade Agreement with Colombia which, according to the Department of Commerce, U.S. Census Bureau has resulted in a near doubling of U.S. exports to Colombia from $8.5 billion in 2007 to $16.4 billion in 2012, and more than double increase in the imports from Colombia from $9.4 billion in 2007 to $24.6 billion in 2012. Many of these imports are parts which are later included in U.S. exports of manufactured goods. In short, the last five years have demonstrated the positive impact of free trade and encouraged the development of alternative products for Colombian farmers. Cocaine is no longer the most contentious commodity in U.S.-Colombia trade flows.

In Brazil, Kerry is expected to focus on developing the Strategic Energy Dialogue and strengthening student exchanges. Brazil currently sends over 9,000 students to study in the U.S. under the government’s ‘Science Without Borders’ program. President Dilma Rousseff would like to send 20,000 students to the U.S. alone to study science, technology, engineering and mathematics. For its part, the U.S. seeks to send 100,000 U.S. students to study in the Western Hemisphere. Another topic is Brazil’s desire to be included within the Visa Waiver Program, which facilitates the movement of tourists and business visitors with most western European nations. Foreign Minister Antonio Patriota considers that Brazil has earned the right to be included in that program. On the U.S. side, concern over the completion of the stadiums, transportation and residential quarters for the forthcoming 2014 World Cup and the 2016 Summer Olympics is related to the willingness of Brazilian citizens to keep relative peace during these important gatherings. This requires that the federal government demonstrate the ability to deliver improved health care and education for its citizens while, at the same time, investing in the massive infrastructure for the games.

The scope of the NSA collection of metadata and Snowden’s declaration that the agency collects information from U.S. allies is a cause of considerable concern in both countries. Once again, it harks back to the hegemonic power and U.S. extensive influence in the days of the Cold War. Kerry will be asked to explain the program, as well as President Obama’s willingness to discuss the broad privacy implications in the warehousing of the metadata. For both U.S. and allied audiences in the hemisphere, citizens are asking to know who listens to whom. Greater comfort on the parameters of the NSA program is needed.

However, the purpose of Kerry’s visit is not purely to answer questions surrounding the NSA. Vice President Biden began that conversation when he called both President Santos of Colombia and President Dilma Rousseff in June. Rather, it is to emphasize the importance that the administration attaches to strong relations with the hemisphere. President Obama visited Mexico and Central America in May, Vice President Biden visited South America and Trinidad and Tobago in June, and Secretary of Agriculture Tom Vilsack visited Brazil in July. A pattern of commitments by senior U.S. officials has developed. Furthermore, Obama will give Dilma Rousseff a State Visit on October 23, enabling Kerry to discuss preparations for that visit. These are small pieces of bilateral tradecraft with which to weave a wholesome cloth.

The challenge is to avoid this visit from being dominated by the NSA revelations. Kerry carries neither a new strategic initiative nor a new partnership. He holds few, if any deliverables. Therefore, his personal diplomacy must persuade two important hemispheric allies that U.S. is a dependable partner. In the midst of convulsions in the Middle East and the early days of Palestinian talks, Kerry created time to visit the neighborhood where the U.S. is working hard to improve its relationships.

[2] Senator John Kerry joined 23 U.S. Senators in a letter to Colombia President Alvaro Uribe, July 26, 2004.

[3] Senator John Kerry statement upon the announcement of peace talks between the Colombian government and the FARC, September 4, 2012; http://www.foreign.senate.gov/press/chair/release/kerry-statement-on-colombian-peace-negotiations-with-farc.

Both major political parties have or will publish their bills to reform the two institutions that control Mexico’s energy, Petróleos Mexicanos (PEMEX) and the Comisión Federal de Electricidad (CFE). In any other nation, these proposals might go unnoticed or be considered routine, but in Mexico the prospect of opening up both behemoths to private investment and reducing their regulatory role presents a radical change. The left has not presented a bill, but talks of alternative measures including protests and strikes. The former leftist presidential candidate, Andrés Manuel López Obrador, has vowed to bring out his supporters to protest any opening of the energy sector to private investment and the prospect of turbulence causes concern in Mexico. Is the reform of Mexico’s energy sector the bronco that could destabilize a delicate balance between the left, the center and the center-right parties? Why is energy reform such a volatile issue?

Energy reform is a flammable issue, replete with historical memories, national identity and global challenges. Therefore, over the last eight months, representatives from the three major political parties have discussed the shape of Mexico’s energy reform behind closed doors. Back in August 2012 and having badly lost the presidential election, the leftist Partido de la Revolución Democrática (PRD) initiated the process of discussion and consensus among the three major parties through a collaboration known as the Pacto por México. The Pacto members meet outside the halls of Congress, but its purpose is to present a consensus to the legislature so as to speed up Congressional discussion of relevant bills. Thus, passage of an education and communication law passed the lower house with little debate and remarkable speed. However, no consensus was reached on the issue of how to reform the energy sector beyond the statement that “hydrocarbons will remain as a State property.” Opinions were radically different.

In the last few days, the three political parties geared up to publish their respective bills and to muster their supporters. The proposals are characterized as energy reforms, but in reality they are reforms to the institutions created to manage the nation’s energy resources, namely PEMEX and CFE. The fundamental question is whether PEMEX and CFE should continue to be government agencies extracting hydrocarbons and producing electricity for the benefit of Mexican citizens, or whether they should become autonomous energy companies, capable of making profits, growing the energy resource, and competing on the world stage?

PEMEX is broke with losses of 49 billion pesos (US $4 billion) for the 2nd quarter of 2013, and energy subsidies to consumers exceeding 31.75 percent of the federal budget for the 1st quarter of 2013. PEMEX imports half of the gasoline sold in Mexico, half of the gas used in its industries and 80 percent of the petrochemicals processed in Mexico. Agreement exists among the major political parties on the need to reform PEMEX, but disagreement rears up in an emotional manner on how to reform both monopolies.

President Lázaro Cárdenas nationalized the energy resources of Mexico, taking the petroleum resource from Standard Oil of California (now Chevron), New Jersey Standard and Royal Dutch/Shell Company in March 1938. In November 1940, an addition to Article 27 prohibited the granting of concessions in “oil and liquid, solid, or gas hydrocarbons”. In January 1960, the Mexican congress added the phrase that:

Ownership of all natural resources of the continental shelf and submarine shelf of the islands…all minerals or substances...from the earth itself, such as…solid mineral fuels, petroleum and all solid, liquid and gaseous hydrocarbons; are vested in the Nation.

To manage those resources, Cárdenas created PEMEX by statutory law in 1938. The principle of national ownership of the petroleum, liquid and gaseous hydrocarbons has remained sacrosanct in Mexican political values and any change to this principle would require a lengthy, national debate. However, changes to the institution of PEMEX hold less privilege. It is therefore not surprising that a recent survey commissioned by the Chamber of Deputies found that 75 percent of those polled considered that the management of PEMEX was bad, or fair.[1] Only 17 percent considered management to be good. Furthermore, 88 percent of those polled thought that “very much” or “a certain amount” of corruption existed within PEMEX. Consequently, reform of PEMEX finds popular support. However, reform of the fundamental principles enshrined in Article 27 remains improbable.

Within the Pacto Por México, the representatives agreed that, “Hydrocarbons will remain a property of the National, [but] competition will be introduced in the refining, petrochemical and transportation fields.” [2] Within this broad parameter, the members of the Pacto began the most important national debate of the last century. Given the sensitivity of the issues, discussions were not carried out in public, nor among citizens and their representatives, but rather among an elite chosen by their respective political parties to represent their interests within the Pacto.

Emerging from eight months of discussion within the Pacto are proposals for energy reform from each of the major parties, the governing PRI, the center-right PAN and the left PRD. All agree that PEMEX and CFE should be reformed to clean out corruption and to lower costs. However, there is no agreement on how PEMEX should be structured to lower its outstanding debt and to operate as a profit making enterprise.

On July 31, the PAN sent its energy reform bill to Congress. It seeks to break up the CFE’s “monopolio paraestatal” on electricity generation and distribution. It would also reduce PEMEX outstanding debt through the issuance of new debt, as well as hybrid securities, known as ‘Citizen Bonds’ and the sale of shares to private investors. Production sharing contracts would be legal, in return for which participating companies would pay royalties, taxes and licenses. PEMEX would become autonomous from the government and be subject to regulation by a newly formed, Comisión Nacional de Hidrocarburos (CNH). A more radical aspect of the PAN bill seeks to eliminate the five union seats on PEMEX Board of Directors.

The PRI’s focus is on expanding current energy sources, generating new energy and reducing the current high costs through the participation of the private sector, which could be Mexican or international.[3] Javier Treviño, a prominent member of the PRI and secretary of the congressional energy committee said in an interview on August 1 that the government’s bill would allow either production or profit sharing contracts between private companies and PEMEX, or both. In order to assure private investors of their rights in both institutions, Constitutional Article 27, as well as Articles 28 and 25 need to be amended. Whether private participation is large enough to break up of the state’s monopoly in both PEMEX and CFE remains unclear and depends upon the size of the equity and bond issuance to private investors and creditors. For the time being, this issue has not been discussed publicly.

The PRD objects strongly. It does not have a single position, but is divided among three factions, or tribus, each with a distinct response. Cuauhtémoc Cárdenas, the son of the president who nationalized the oil resources, stands against private investment in PEMEX. Instead, he would modify the tax system so as to increase PEMEX resources and capacity to refine. He recognizes the need to introduce transparency into the operations of PEMEX and root out corruption, both of which have affected the capability of the “paraestatal” to compete, but he rejects changes to the Mexican constitution. Cuauhtémoc’s personal and moral leadership on energy issues makes him a strong ally for the former mayor of Mexico City and contender for the PRD leadership in 2018, Marcel Ebrard.

The national leader of the PRD, Jesús Zambrano, also defends national ownership of the energy resources. In support of this position, he has called for popular consultations on the proposed energy reform to take place on August 25 and September 1. The PRD would set up 3,400 tables throughout the country and expect to gather the opinions of 1.5 million Mexicans.

The most fiery of the broad PRD tribus is Andrés Manuel Lopez Obrador who left the PRD to form his own Movimiento de Regeneración Nacional (Morena). He is ready to call his followers into the streets in protest against any privatization of Mexico’s energy resources. It is the prospect of strikes and public demonstrations that concerns the government most, as well as the PRD which is incapable of restraining Lopez Obrador and preventing these disturbances.

With the support of the rightist PAN and the ecology party, the PVEM, President Peña Nieto and the PRI have sufficient votes to pass the constitutional amendments. However, the president would prefer to enact these changes without strikes and protest. Therefore he is making every effort to avoid widespread disturbances and a convulsive political situation which might frighten off the very investors that the PRI seeks to attract.

We should anticipate that the Lopez Obrador bronco will buck, but not for long. Peña Nieto will use the bully pulpit to persuade citizens that reform to both institutions is essential for economic growth and jobs. With the support of the PAN and the PVEM, he will achieve the constitutional changes. Afterwards and slowly Mexicans will become accustomed to more than one energy company delivering services, although the arrival of the XYZ gas station across the street from the PEMEX station may cause a stir as it seeks to compete. The time is ripe to introduce the reforms and Peña Nieto should hold firm while citizens express their opinions and gradually accept the new reality.

Authors

Both major political parties have or will publish their bills to reform the two institutions that control Mexico’s energy, Petróleos Mexicanos (PEMEX) and the Comisión Federal de Electricidad (CFE). In any other nation, these proposals might go unnoticed or be considered routine, but in Mexico the prospect of opening up both behemoths to private investment and reducing their regulatory role presents a radical change. The left has not presented a bill, but talks of alternative measures including protests and strikes. The former leftist presidential candidate, Andrés Manuel López Obrador, has vowed to bring out his supporters to protest any opening of the energy sector to private investment and the prospect of turbulence causes concern in Mexico. Is the reform of Mexico’s energy sector the bronco that could destabilize a delicate balance between the left, the center and the center-right parties? Why is energy reform such a volatile issue?

Energy reform is a flammable issue, replete with historical memories, national identity and global challenges. Therefore, over the last eight months, representatives from the three major political parties have discussed the shape of Mexico’s energy reform behind closed doors. Back in August 2012 and having badly lost the presidential election, the leftist Partido de la Revolución Democrática (PRD) initiated the process of discussion and consensus among the three major parties through a collaboration known as the Pacto por México. The Pacto members meet outside the halls of Congress, but its purpose is to present a consensus to the legislature so as to speed up Congressional discussion of relevant bills. Thus, passage of an education and communication law passed the lower house with little debate and remarkable speed. However, no consensus was reached on the issue of how to reform the energy sector beyond the statement that “hydrocarbons will remain as a State property.” Opinions were radically different.

In the last few days, the three political parties geared up to publish their respective bills and to muster their supporters. The proposals are characterized as energy reforms, but in reality they are reforms to the institutions created to manage the nation’s energy resources, namely PEMEX and CFE. The fundamental question is whether PEMEX and CFE should continue to be government agencies extracting hydrocarbons and producing electricity for the benefit of Mexican citizens, or whether they should become autonomous energy companies, capable of making profits, growing the energy resource, and competing on the world stage?

PEMEX is broke with losses of 49 billion pesos (US $4 billion) for the 2nd quarter of 2013, and energy subsidies to consumers exceeding 31.75 percent of the federal budget for the 1st quarter of 2013. PEMEX imports half of the gasoline sold in Mexico, half of the gas used in its industries and 80 percent of the petrochemicals processed in Mexico. Agreement exists among the major political parties on the need to reform PEMEX, but disagreement rears up in an emotional manner on how to reform both monopolies.

President Lázaro Cárdenas nationalized the energy resources of Mexico, taking the petroleum resource from Standard Oil of California (now Chevron), New Jersey Standard and Royal Dutch/Shell Company in March 1938. In November 1940, an addition to Article 27 prohibited the granting of concessions in “oil and liquid, solid, or gas hydrocarbons”. In January 1960, the Mexican congress added the phrase that:

Ownership of all natural resources of the continental shelf and submarine shelf of the islands…all minerals or substances...from the earth itself, such as…solid mineral fuels, petroleum and all solid, liquid and gaseous hydrocarbons; are vested in the Nation.

To manage those resources, Cárdenas created PEMEX by statutory law in 1938. The principle of national ownership of the petroleum, liquid and gaseous hydrocarbons has remained sacrosanct in Mexican political values and any change to this principle would require a lengthy, national debate. However, changes to the institution of PEMEX hold less privilege. It is therefore not surprising that a recent survey commissioned by the Chamber of Deputies found that 75 percent of those polled considered that the management of PEMEX was bad, or fair.[1] Only 17 percent considered management to be good. Furthermore, 88 percent of those polled thought that “very much” or “a certain amount” of corruption existed within PEMEX. Consequently, reform of PEMEX finds popular support. However, reform of the fundamental principles enshrined in Article 27 remains improbable.

Within the Pacto Por México, the representatives agreed that, “Hydrocarbons will remain a property of the National, [but] competition will be introduced in the refining, petrochemical and transportation fields.” [2] Within this broad parameter, the members of the Pacto began the most important national debate of the last century. Given the sensitivity of the issues, discussions were not carried out in public, nor among citizens and their representatives, but rather among an elite chosen by their respective political parties to represent their interests within the Pacto.

Emerging from eight months of discussion within the Pacto are proposals for energy reform from each of the major parties, the governing PRI, the center-right PAN and the left PRD. All agree that PEMEX and CFE should be reformed to clean out corruption and to lower costs. However, there is no agreement on how PEMEX should be structured to lower its outstanding debt and to operate as a profit making enterprise.

On July 31, the PAN sent its energy reform bill to Congress. It seeks to break up the CFE’s “monopolio paraestatal” on electricity generation and distribution. It would also reduce PEMEX outstanding debt through the issuance of new debt, as well as hybrid securities, known as ‘Citizen Bonds’ and the sale of shares to private investors. Production sharing contracts would be legal, in return for which participating companies would pay royalties, taxes and licenses. PEMEX would become autonomous from the government and be subject to regulation by a newly formed, Comisión Nacional de Hidrocarburos (CNH). A more radical aspect of the PAN bill seeks to eliminate the five union seats on PEMEX Board of Directors.

The PRI’s focus is on expanding current energy sources, generating new energy and reducing the current high costs through the participation of the private sector, which could be Mexican or international.[3] Javier Treviño, a prominent member of the PRI and secretary of the congressional energy committee said in an interview on August 1 that the government’s bill would allow either production or profit sharing contracts between private companies and PEMEX, or both. In order to assure private investors of their rights in both institutions, Constitutional Article 27, as well as Articles 28 and 25 need to be amended. Whether private participation is large enough to break up of the state’s monopoly in both PEMEX and CFE remains unclear and depends upon the size of the equity and bond issuance to private investors and creditors. For the time being, this issue has not been discussed publicly.

The PRD objects strongly. It does not have a single position, but is divided among three factions, or tribus, each with a distinct response. Cuauhtémoc Cárdenas, the son of the president who nationalized the oil resources, stands against private investment in PEMEX. Instead, he would modify the tax system so as to increase PEMEX resources and capacity to refine. He recognizes the need to introduce transparency into the operations of PEMEX and root out corruption, both of which have affected the capability of the “paraestatal” to compete, but he rejects changes to the Mexican constitution. Cuauhtémoc’s personal and moral leadership on energy issues makes him a strong ally for the former mayor of Mexico City and contender for the PRD leadership in 2018, Marcel Ebrard.

The national leader of the PRD, Jesús Zambrano, also defends national ownership of the energy resources. In support of this position, he has called for popular consultations on the proposed energy reform to take place on August 25 and September 1. The PRD would set up 3,400 tables throughout the country and expect to gather the opinions of 1.5 million Mexicans.

The most fiery of the broad PRD tribus is Andrés Manuel Lopez Obrador who left the PRD to form his own Movimiento de Regeneración Nacional (Morena). He is ready to call his followers into the streets in protest against any privatization of Mexico’s energy resources. It is the prospect of strikes and public demonstrations that concerns the government most, as well as the PRD which is incapable of restraining Lopez Obrador and preventing these disturbances.

With the support of the rightist PAN and the ecology party, the PVEM, President Peña Nieto and the PRI have sufficient votes to pass the constitutional amendments. However, the president would prefer to enact these changes without strikes and protest. Therefore he is making every effort to avoid widespread disturbances and a convulsive political situation which might frighten off the very investors that the PRI seeks to attract.

We should anticipate that the Lopez Obrador bronco will buck, but not for long. Peña Nieto will use the bully pulpit to persuade citizens that reform to both institutions is essential for economic growth and jobs. With the support of the PAN and the PVEM, he will achieve the constitutional changes. Afterwards and slowly Mexicans will become accustomed to more than one energy company delivering services, although the arrival of the XYZ gas station across the street from the PEMEX station may cause a stir as it seeks to compete. The time is ripe to introduce the reforms and Peña Nieto should hold firm while citizens express their opinions and gradually accept the new reality.

On Sunday, July 7, Mexicans voted for mayors and councilmen in 900 municipalities, as well as one governor. The electoral campaign was marred by violence. Twelve electoral candidates, family members and campaign workers were assassinated. One was kidnapped and later released. Election Sunday was relatively peaceful, but the weeks leading up to the vote raised the specter that violence in Mexico was not on the wane. Was the electoral violence an exception, or was it reflective of enduring socio-political problems in the country?

On June 24, one of Mexico’s leading experts in violence and security policy, Dr. Eduardo Guerrero Gutiérrez shared his analysis with a public audience at the Brookings Institution. In his opinion, the principal reason for the 100 percent rise in homicides in the years 2009 and 2010 was the government’s arrest or killing of drug cartel leaders, or capos. According to Guerrero, there was no selection of the more dangerous targets; instead the Ministry of Public Security ordered the federal police and military to target all capos with the same intensity, heedless of whether their organization engaged in violence and predatory crimes, or not. Consequently, these nonselective law enforcement operations fostered uncertainty and instability within criminal organizations which relied principally on the capo’s personal reputation. Decapitated organizations splintered with lieutenants assuming part of the drug trade, while others moved into other profitable enterprises, such as extortion. In the same two year period between 2009 and mid-2011, and according to both official and victimization surveys, the rate of extortions in Mexico doubled.

Most high-profile captures were carried out on the basis of information provided by the U.S. government. Consequently, the Ministry of Public Security had a limited ability to employ strategies more suited to domestic and local interests. Communities with significant local security problems were often left out of U.S. surveillance. As a result, these vulnerable local communities protected themselves through the creation of vigilante groups; many of which acted as mafia-style operations, hiring large groups of gunmen and informants. In several cases, they even enjoyed the support from broad sectors of the population. In Michoacán and Guerrero, the mafias continue to contest the local law enforcement authorities for the loyalty of the population, and sometimes it is hard to tell the difference between the criminal mafia and the legitimate local police.

In mid-2011, the federal government ended nonselective targeting of capos and began to select the capos of the more violent criminal organizations, principally the Zetas. This shift in strategy may have induced the leaders of less violent gangs to employ less violent methods; certainly a moderate, but steady decline in homicides can be noted. Guerrero notes a 9.2 percent reduction in drug related homicides in the first six months of the Peña Nieto administration, compared to the last six months of the Calderon administration.

While states near the U.S. border have registered larger reductions in violence, states in the center of Mexico have registered increases. The implication of the shift in violence from former high-intensity areas on the northern border and along the drug trafficking routes to previously low-intensity areas is attributable to a change in the nature of illicit trades. There is now more kidnapping, robbery and extortion; all intended to maintain revenue flows for the criminal organizations. To facilitate these operations political patrons and acquiescent police chiefs are needed. This has led to competition between mafias and criminal organizations for friendly politicians and pliant police officers. In other words, crime has metastasized from drug trafficking into less profitable, but more pervasive criminal pursuits.

Of the dozen assassinations of political candidates since February 2013, only two occurred in states on the northern border. David Carrasco, the PAN candidate for mayor of the municipality of Julimes, and Jaime Orozco, candidate for mayor of Guadalupe y Calvo, were murdered in the northern state of Chihuahua. In both municipalities, the mayor exercised considerable authority over their respective small populations and was well positioned to influence cartel activity along drug routes. The 10 other political murders occurred in the center of Mexico, some distance from the course of traditional drug cartels. This suggests that the majority of political murders in the recent local elections were not related to drug trafficking, but to criminal activities that pitted one cartel against another in the North and one mafia against another in central and southern Mexico. Rosalía Palma, the PRI candidate for the municipal council in Oaxaca survived the assassination attempt, but she lost both her husband and her nephew in the fatal attack by a competing mafia family.

Sergio Aguayo, author and the voice for multiple social justice movements, estimates that 20 percent of those who voted in the July 7 elections voted under the threat of violence. This is three times higher than in the local elections of 2009. Aguayo asks: How many political officials were elected by a vote and how many were placed in their position by organized crime? We shall never know the answer, but the troubling fact is that the lines between politicians, policemen and criminals become harder to distinguish. The governing party, the PRI, contested all 900 municipal elections, but the opposition parties -- center-right PAN and leftist PRD -- registered no candidate in multiple municipalities in the northern states of Chihuahua, Durango and Tamaulipas due to insecurity. We shall continue to research both the failure to register candidates for mayors, as well as the withdrawal of candidates due to threats of violence.

Based on the growth of social movements dedicated to stopping the violence and three other factors, Guerrero expressed hope in his Brookings speech that Mexico’s landscape of insecurity can improve. He applauds the government strategy of focusing on the most violent criminal organizations, but warns that if law enforcement is otherwise absent, local citizens will create vigilante groups to protect themselves. Second, Guerrero notes that local gangs who previously worked for criminal organizations have shied away from collaborating with the cartels. Aware of the dangers and risks involved, recruitment is down. Finally, Guerrero recognizes and applauds the fact that both the federal government and some state governments have become more effective in containing the violence. To continue this effort, local intelligence sharing must improve and less reliance placed on U.S. sources.

The optimism of Guerrero and the pessimism of Aguayo are not necessarily contradictory. The changes in criminal behavior noted by Guerrero have resulted in the spread of violence throughout Mexico. When the officials considered necessary to facilitate criminal enterprises are up for the vote, political parties, local mafias and drug traffickers all compete to ensure the victory of their favorite. We may expect a reduction in political homicides in the months following these elections, but the manipulation of political parties to ensure that decisions comply with the will of local mafias and criminal cartels will not go away. This is a dangerous sport. Sicilians suffered the mafias’ control of politicians and elections for close to 30 years before its citizens rose up and demanded a cleansing of the political system. Guerrero emphasizes the importance of citizen protest through social movements to root out corruption. Indeed, Mexicans in the hundreds have begun to protest, but the movements will have to be better organized, demonstrate independence from ideology and sustain their demand for change before consistent results can be demonstrated. In Mexico, a decade of sustained citizen effort is needed.

Authors

On Sunday, July 7, Mexicans voted for mayors and councilmen in 900 municipalities, as well as one governor. The electoral campaign was marred by violence. Twelve electoral candidates, family members and campaign workers were assassinated. One was kidnapped and later released. Election Sunday was relatively peaceful, but the weeks leading up to the vote raised the specter that violence in Mexico was not on the wane. Was the electoral violence an exception, or was it reflective of enduring socio-political problems in the country?

On June 24, one of Mexico’s leading experts in violence and security policy, Dr. Eduardo Guerrero Gutiérrez shared his analysis with a public audience at the Brookings Institution. In his opinion, the principal reason for the 100 percent rise in homicides in the years 2009 and 2010 was the government’s arrest or killing of drug cartel leaders, or capos. According to Guerrero, there was no selection of the more dangerous targets; instead the Ministry of Public Security ordered the federal police and military to target all capos with the same intensity, heedless of whether their organization engaged in violence and predatory crimes, or not. Consequently, these nonselective law enforcement operations fostered uncertainty and instability within criminal organizations which relied principally on the capo’s personal reputation. Decapitated organizations splintered with lieutenants assuming part of the drug trade, while others moved into other profitable enterprises, such as extortion. In the same two year period between 2009 and mid-2011, and according to both official and victimization surveys, the rate of extortions in Mexico doubled.

Most high-profile captures were carried out on the basis of information provided by the U.S. government. Consequently, the Ministry of Public Security had a limited ability to employ strategies more suited to domestic and local interests. Communities with significant local security problems were often left out of U.S. surveillance. As a result, these vulnerable local communities protected themselves through the creation of vigilante groups; many of which acted as mafia-style operations, hiring large groups of gunmen and informants. In several cases, they even enjoyed the support from broad sectors of the population. In Michoacán and Guerrero, the mafias continue to contest the local law enforcement authorities for the loyalty of the population, and sometimes it is hard to tell the difference between the criminal mafia and the legitimate local police.

In mid-2011, the federal government ended nonselective targeting of capos and began to select the capos of the more violent criminal organizations, principally the Zetas. This shift in strategy may have induced the leaders of less violent gangs to employ less violent methods; certainly a moderate, but steady decline in homicides can be noted. Guerrero notes a 9.2 percent reduction in drug related homicides in the first six months of the Peña Nieto administration, compared to the last six months of the Calderon administration.

While states near the U.S. border have registered larger reductions in violence, states in the center of Mexico have registered increases. The implication of the shift in violence from former high-intensity areas on the northern border and along the drug trafficking routes to previously low-intensity areas is attributable to a change in the nature of illicit trades. There is now more kidnapping, robbery and extortion; all intended to maintain revenue flows for the criminal organizations. To facilitate these operations political patrons and acquiescent police chiefs are needed. This has led to competition between mafias and criminal organizations for friendly politicians and pliant police officers. In other words, crime has metastasized from drug trafficking into less profitable, but more pervasive criminal pursuits.

Of the dozen assassinations of political candidates since February 2013, only two occurred in states on the northern border. David Carrasco, the PAN candidate for mayor of the municipality of Julimes, and Jaime Orozco, candidate for mayor of Guadalupe y Calvo, were murdered in the northern state of Chihuahua. In both municipalities, the mayor exercised considerable authority over their respective small populations and was well positioned to influence cartel activity along drug routes. The 10 other political murders occurred in the center of Mexico, some distance from the course of traditional drug cartels. This suggests that the majority of political murders in the recent local elections were not related to drug trafficking, but to criminal activities that pitted one cartel against another in the North and one mafia against another in central and southern Mexico. Rosalía Palma, the PRI candidate for the municipal council in Oaxaca survived the assassination attempt, but she lost both her husband and her nephew in the fatal attack by a competing mafia family.

Sergio Aguayo, author and the voice for multiple social justice movements, estimates that 20 percent of those who voted in the July 7 elections voted under the threat of violence. This is three times higher than in the local elections of 2009. Aguayo asks: How many political officials were elected by a vote and how many were placed in their position by organized crime? We shall never know the answer, but the troubling fact is that the lines between politicians, policemen and criminals become harder to distinguish. The governing party, the PRI, contested all 900 municipal elections, but the opposition parties -- center-right PAN and leftist PRD -- registered no candidate in multiple municipalities in the northern states of Chihuahua, Durango and Tamaulipas due to insecurity. We shall continue to research both the failure to register candidates for mayors, as well as the withdrawal of candidates due to threats of violence.

Based on the growth of social movements dedicated to stopping the violence and three other factors, Guerrero expressed hope in his Brookings speech that Mexico’s landscape of insecurity can improve. He applauds the government strategy of focusing on the most violent criminal organizations, but warns that if law enforcement is otherwise absent, local citizens will create vigilante groups to protect themselves. Second, Guerrero notes that local gangs who previously worked for criminal organizations have shied away from collaborating with the cartels. Aware of the dangers and risks involved, recruitment is down. Finally, Guerrero recognizes and applauds the fact that both the federal government and some state governments have become more effective in containing the violence. To continue this effort, local intelligence sharing must improve and less reliance placed on U.S. sources.

The optimism of Guerrero and the pessimism of Aguayo are not necessarily contradictory. The changes in criminal behavior noted by Guerrero have resulted in the spread of violence throughout Mexico. When the officials considered necessary to facilitate criminal enterprises are up for the vote, political parties, local mafias and drug traffickers all compete to ensure the victory of their favorite. We may expect a reduction in political homicides in the months following these elections, but the manipulation of political parties to ensure that decisions comply with the will of local mafias and criminal cartels will not go away. This is a dangerous sport. Sicilians suffered the mafias’ control of politicians and elections for close to 30 years before its citizens rose up and demanded a cleansing of the political system. Guerrero emphasizes the importance of citizen protest through social movements to root out corruption. Indeed, Mexicans in the hundreds have begun to protest, but the movements will have to be better organized, demonstrate independence from ideology and sustain their demand for change before consistent results can be demonstrated. In Mexico, a decade of sustained citizen effort is needed.